understandable regulation that is accessible and easy to comply with and to enforce, especially given resource and other constraints. In considering what laws and regulations should be introduced to stimulate access to primary markets, there is a need to have regard to the stage of development of the securities market in the country in order to ensure that the laws will be a good fit in the existing legal framework and cultural environment.

It is not essential to introduce rules that reflect international best practice in one step if the rules are not relevant for the efficient conduct of the market or if the market is not sufficiently mature to absorb them. It is important for the country to develop a program of reform that will facilitate development by striking a balance between changes that are necessary in order to move towards best practice and not making too many changes that exhaust the market’s appetite for reform and impede development. It is desirable to promote a program that will permit relevant actors in public and private sectors to move in the same direction at the same time over a reasonable timeframe that adapts to the current circumstances. It is a matter of balancing the desire to foster entrepreneurial activity against the need to adequately protect investors in the primary market. It may also be relevant to consider regional differences where laws are to be harmonized to promote regional initiatives and ensure that new rules will dovetail readily with the rules of nearby markets where linkages or alliances are likely to be forged in the future.

# **B.  Minimum rules and standards required to support the market**

While capital markets still form a small and relatively insignificant portion of the economy in many emerging markets, this is not a reason to avoid funding reform efforts. “Developing-country equity markets are small and often insignificant precisely because they are poorly regulated.”<sup>18</sup> Without basic information disclosure and confidence in their ability to enforce their rights, investors will be unwilling to risk investments in stock market, or will discount the price of the companies whose securities they purchase, stronger companies will refrain from listing or go elsewhere, and the market will remain small.

A basic legal and regulatory structure is necessary to provide investors with the confidence to trade at arms length in a market where they lack information and risk expropriation by majority owners, and to permit firms to take on anonymous dealings and obtain outside funding from banks or investors.<sup>19</sup> Disclosure and transparency help enhance the honesty and integrity of the securities market, thereby promoting the confidence of both investors and issuers. For this reason, disclosure is critical, and is the basis on which developed securities markets are regulated. “By focusing on market integrity and full disclosure, the regulatory system can foster growth and development without running the risk of becoming out-dated and unresponsive.”<sup>20</sup> The oft-cited research by La Porta et. al., concluding that “what

> 18 P. Henry and P. Lorentzen 2003

> 19McMillan and Woodruff 2002

> 20 Mann 1993

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