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ISSUES IN EQUITIES MARKET DEVELOPMENT AND INTEGRATION BY KELVIN SERGEANT ECONOMIC CONSULTANT The Theory Securities Market are important because: They allocate savings by way of investments in businesses and public enterprises which create optimal expected returns to investors
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ISSUES IN EQUITIES MARKET DEVELOPMENT AND INTEGRATION • BY • KELVIN SERGEANT • ECONOMIC CONSULTANT
The Theory • Securities Market are important because: • They allocate savings by way of investments in businesses and public enterprises which create optimal expected returns to investors • They provide price formation mechanisms and set benchmarks for value in the economy • They promote efficiencies in business and public enterprise • They facilitate accumulation of capital and higher productivity thereby promoting economic growth
Listings on Local Exchanges: The Reality • Throughout the Caribbean, firms choose to operate as privately held firms rather than as publicly held firms • Of the 28,621(CSO 2005) businesses operating in T&T, only 28 are listed in the TTSE
No. of Firms classified by Firm Size Source: Census of Establishment of the CSO. Trinidad and Tobago
The Reality (continued) • Assuming that firms are not highly leveraged, an estimated 761 firms from the Table have the minimum level of Capital needed to be listed • Since only 28 domestic firms are listed, it means that 97% of these firms opt not to list • Interestingly, in large countries like the USA, UK and Canada, this phenomenon also prevails
No. of Registered and Listed Firms:USA, UK and Canada, 2004 Source: US Census Bureau; UK Gov’t Register of CO.; Canada Bus. Register; Regional Stock Exchanges and Registrars
Reasons for lack of Listings on Local Stock Exchanges • The reluctance of firms to list in the Caribbean is a result of three major issues • The legacy of legacy ownership of firms • The structure of the capital markets • The regulatory framework of the respective domestic capital markets and the perceived risks associated with using the local securities markets • The markets are non transparent and controlled by a few major market actors (interlocking directors) • The prohibitive cost of listing in the local stock exchanges
Interlocking Directorates and Market Capitalization: Trinidad and Tobago Source: TTSEC Report On Developments in the T&T Securities Market, 1997-2003
Cross Border / Cross-Listings • In the Caribbean, there are 123 listed companies (Guyana included). • Most of these 132 companies operate within the financial services sector which accounts for 32% of the listed firms while the manufacturing sector accounts for the second highest number of firms, 26% • Interestingly, although tourism is a major sector in most countries in the Caribbean, very few firms in the tourism sector are listed. Only 13% of the firms in that sector are listed.
SECTOR DISTRIBUTION OF THE JSE, BSE and TTSE SHOWS STRONG PRESENCE OF FINANCIALS Barbados Jamaica Trinidad Source: JMMB Securities Ltd. analysis 2003
Benefits of Cross-listing to the Company • Investors can take advantage of cross rates, arbitrage trading and higher prices • The securities could create a larger and wider interest in the prosperity of the company • Easier access to future financing • Cross-listing expands business relationships
Benefits of Cross-Listing to the Investor • The ability to diversify an investment portfolio • The comfort that the company was solvent, a going concern one with a certain minimum amount of the securities in the hands of the public • Continuous listing on the Exchange means that reasonable and current information is available about the security • The securities will most likely have higher collateral value and should permit wider portfolio diversification, thus allow for financial planning • Protection against unreasonable commissions and low standards of business practice • Protection against violent fluctuation
Cross-Listings (continued) • Notwithstanding these benefits of cross-listings, there are currently only thirteen cross-listed securities on five of the seven Stock Exchanges in the region. • Of that number, 8 are cross listed securities on the TTSE, 5 in Barbados, 4 in Jamaica and 2 in the OECS. There are no cross listed securities in Guyana or Suriname. • Since there are 118 ordinary securities listed on the exchange combined, the number of securities cross listed is a mere 11.02%
CROSS LISTED STOCKS HAVE GROWN IN RECENT YEARS ACROSS THE TTSE, BSE and JSE Trinidad Barbados 5 of 24 7 of 32 Jamaica 4 of 39
Challenges to Cross-Listings • The challenges to cross-listing revolve around listing and compliance requirements as well as the entire legislative framework of the jurisdictions in which the firms operate
CHALLENGES OF CROSS BORDER OPERATIONS • Registering on a Regional Stock Market • Different disclosure and listing requirements (SEC) • Different reporting requirement particularly as they relate to the periodicity of reporting • Different requirements with respect to restrictions on shareholding • Differences with respect to take over codes on the various stock exchanges
CHALLENGES OF CROSS BORDER OPERATIONS • Restrictions on shareholding • The Barbados Stock Exchange allows publicly traded companies to place in their bye-laws provisions which restrict individuals from holding over and above a certain amount of issue share capital of a public company
CHALLENGES OF CROSS BORDER OPERATIONS • Restrictions on shareholding • The Trinidad and Tobago Stock Exchange by contrast requires that any such restriction be removed before a company may be listed although there is a discretion to allow the listing notwithstanding the prohibition
CHALLENGES OF CROSS BORDER OPERATIONS • Restrictions on shareholding • State enterprises in Trinidad and Tobago which are listed in the stock exchange are allowed to have restricted shareholding
CHALLENGESOF CROSS BORDER OPERATIONS • Take Over Code • The Take-Over Code is triggered in Barbados at 25% • Take-Over Code is triggered in Jamaica at 50% • Take-Over Code is triggered in Trinidad at 30% • There are presently several cross-listed companies
CHALLENGES OF CROSS BORDER OPERATIONS • With respect to the cross-listed companies, the following issue arises: • Assume 49% of the issued share capital of a cross-listed company acquired in Jamaica • Assume further that the country’s home base is Barbados (where Take-Over code is triggered at 25%
CHALLENGES OF CROSS BORDER OPERATIONS • Assume that a further 10% of the issued capital is bought either by the same company, a subsidiary or an affiliate or the floor of the Trinidad stock exchange • What are the implications? • Have the Laws been broken? • In which country has the law been broken? • What are the remedies?
CHALLENGES OF CROSS BORDER OPERATIONS • Some jurisdictions require Central Bank notification to facilitate the expatriation of capital (Fixed Exchange Rate Jurisdictions) • Some jurisdictions only allow registration to conduct business to investment grade banks
Need for a Coordinated Regulatory Approach • The regulation of market participants including SRO’s • The raising of capital, whether by public offerings or a private placement • The issue of new securities as a result of employee bonus or share option schemes • Insider trading rules • Take-over rules • Compliance audits and inspections
Coordinated Approach (continued) • Securities registrations • Listing obligations • Reporting obligations • Disclosure requirements • Corporate governance guidelines • Fee structures • The legal recognition of companies with fully dematerialized share registers
The Need For A Common Regulatory Approach • A common regulatory framework is the necessary bedrock for establishing a regional stock exchange system, regardless of which one of the mechanism is chosen; an enhanced system of cross-listing and cross-trading; electronically based inter connectivity between the existing stock exchanges; and a single regional stock exchange; using as its platform one of the existing stock exchanges.
Broad Policy Requirements • Caribbean markets require a number of policies initiatives designed to: • Ensure that listed companies follow best practice so as to encourage more firms to go public and apply for listing • Actively encourage more firms to cross-list regionally • Ensure that cross-border equity relationships and the ease of access to cross border money and capital markets are facilitated
For Firms to list Locally or Regionally • Firms must understand the listing requirements in each markets • There must be adequate intermediary support • Interlocking directors should be minimized • There must be greater investor education programmes.
For Access to Cross-border markets • There should be harmonization of company law, disclosure requirements, taxation policies • There should be an MOU to treat with the issue of listing fees • There must be cross-border supervision • There must be harmonized listing rules and trading procedures • Communication and technology harmonization is also crucial
THE END • THANK YOU