04 / 19 / 24

Financing through the Mexican Stock Exchange: What are the reasons behind companies’ delisting?

MEXICO CITY, MEXICO, April 19th, 2024 – The recent reform of the Securities Market Law (“LMV” for its acronym in Spanish) does not aim to reduce stock market delisting, but rather to allow smaller companies to register on the stock exchange and stay listed with fewer regulatory requirements.

The issuers of securities that choose to be listed on any of the Stock Exchanges in Mexico do so for various fundamental reasons: firstly, listing on the stock exchange provides access to a stable source of financing, allowing companies to raise capital to finance their operations and expansion projects, research and development, acquisitions, or other business strategic initiatives by issuing different instruments that, being publicly traded, can be attractive to various types of investors. 

Additionally, listing on the stock exchange increases the visibility and reputation of the issuing company, which can facilitate attracting human capital, business partners, strategic alliances, and potential clients. 

Similarly, a company’s marketability can improve its valuation and provide a platform for the monetization of the existing shareholders’ investment, as a way for them to liquidate part of their stake in the company, offering a partial or total exit from their investment, if required. 

Ultimately, listing on the stock exchange contributes to the country’s economic development by promoting investment, generating employment, and promoting transparency in the financial market.

However, even though stock market brokerage may seem attractive to investors, the current reality of the stock market in Mexico faces various challenges. 

Although the Mexican Stock Exchange has experienced fluctuations in response to global and local events, such as the COVID-19 pandemic, it is influenced by a series of economic, political, and social factors that set difficulties, such as volatility in asset prices, lack of promotion of stock market transactions, political uncertainty, and strict regulations, which often result in the loss of investor confidence. This often leads to companies delisting, as well as the cancellation of the registration of their securities in the Mexican National Securities Registry. As a result, they seek private financing through institutional investors or private equity funds or turn to foreign financial markets with higher returns.

Delisting of companies in Mexico

Now, delisting is a process that, although increasingly common in the financial market, does not necessarily mean that the issuer is facing financial challenges. This process can result from factors ranging from strategic business decisions of the companies (to address immediate needs) and resulting in a greater autonomy for decision-making, such as mergers and acquisitions and corporate restructurings, to non-compliance by issuers of securities with the applicable legal requirements and even changes in the economic and regulatory environment. Therefore, it is important to analyze each case to determine the cause behind the relevant delisting.

The more companies participate in the financial markets, the stronger the flow of resources in the country. Thus, the delisting of companies, whatever the causes, results in fewer investment projects in Mexico, affecting supply chains and reducing sources of employment, which generates an unpleasant impact on the country’s economy.

It is important to remember that listed companies must comply with certain financial obligations to determine their stock market capacity, focusing on transparency and accountability. These obligations include, but are not limited to:

  • Filing periodic reports that include financial information, both quarterly and annually.
  • Conducting external audit processes.
  • Disclosing relevant information to the market in a timely and accurate manner.

Likewise, companies listed on the Mexican Stock Exchange must comply with certain provisions regarding corporate governance. This entails, among other things, establishing robust corporate governance practices that promote transparency, business ethics, and the protection of investors’ interests. Additionally, it involves appointing specialized committees, such as the audit committee and the corporate practices committee, to oversee specific aspects of their management and ensure compliance with current regulations, in accordance with the standards set by the National Banking and Securities Commission (“CNBV” for its acronym in Spanish) and the stock exchange where their securities are listed.

It is evident that compliance with regulatory obligations by companies listed on the stock exchange in Mexico also entails significant costs. These costs may include hiring specialized personnel, implementing systems and technologies for the generation and presentation of financial reports, continuous training of staff on regulatory issues, and expenses related to external audits.

Proper compliance with regulations is not only necessary for issuers to maintain their listing status, but it also helps strengthen investor confidence and mitigate legal and reputational risks.

However, the problem arises when the associated costs exceed the capabilities of companies, especially small and medium-sized, to meet these requirements and compete with larger companies in raising capital. As a consequence, these companies sometimes choose to forego these costs by delisting.

The purpose of the Securities Market Law reform

Considering the above, certain reforms to the Securities Market Law were published in December 2023, driven by brokerage firms, issuers, investors, and the National Banking and Securities Commission itself, towards opening up the stock market to small and medium-sized issuers by allowing any type of security to be listed on the exchange through a simplified public offering process.

In general, the reform promises, on the one hand, to propose simpler processes and procedures and lower costs for small and medium-sized issuers compared to those currently required by large companies. On the other hand, it aims to allow investment in various types of assets through the creation of new institutions, such as hedge funds, to prevent issuers from leaving the Mexican stock market by migrating to other countries through the easing of listing processes.

In recent years, among the companies that have delisted from the Mexican Stock Exchange or are in the process of delisting are Grupo Sanborns, Banco Santander México, Monex, Rassini, Grupo Lala, IEnova, Bio Pappel, General de Seguros, Maxcom, Fortaleza Materiales, Aeroméxico, Elementia, ICA, Farmacias Benavides, and Bachoco. 

These companies have not cited regulatory compliance as the main reason for their delisting, but rather low valuations of listed assets, low interest rates, high volatility, and, in cases like IEnova, mergers and corporate restructurings.

It is worth pointing out that currently, the country’s legal and political uncertainty, combined with the aforementioned factors, has led companies to prefer investing in other types of assets or seeking sources of financing with a lower level of risk, thereby reducing the marketability of the Mexican market.

In view of the foregoing, while it is true that the reform seems like a good initiative to open up the stock market, to date, the existing regulation still appears inadequate and unclear to determine whether the new procedures and figures will effectively prevent companies from delisting.

In principle, it does not seem that the reform will be a mechanism aimed at reducing the number of delistings, but rather it would allow the listing of smaller companies and possibly their maintenance in the stock market by having to comply with a smaller set of regulatory requirements. That is, it does not seem to offer real alternatives for large companies currently listed on the stock exchange (which, moreover, mostly have sufficient resources to meet regulatory requirements) to address valuation and volatility issues, which seem to be the real points to address to ensure interest in the capital market.

However, it will be necessary to, in due time, carefully analyze the secondary regulations contained in the general provisions issued by the National Banking and Securities Commission regarding this reform, which may differ from or be more attractive than those currently applicable to issuers in Mexico.

The full article was made in collaboration with Lexlatin, and you can find the original article in Spanish herein: https://lexlatin.com/opinion/bolsa-mexicana-valores-finanaciamiento-razones-desliste 

All the information placed in this article and the rights of distribution belongs to @Lexlatin.

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