Issues in equities market development and integration / Kelvin ...


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Issues in equities market development and integration / Kelvin ...

  2. 2. The Theory <ul><li>Securities Market are important because: </li></ul><ul><ul><ul><li>They allocate savings by way of investments in businesses and public enterprises which create optimal expected returns to investors </li></ul></ul></ul><ul><ul><ul><li>They provide price formation mechanisms and set benchmarks for value in the economy </li></ul></ul></ul><ul><ul><ul><li>They promote efficiencies in business and public enterprise </li></ul></ul></ul><ul><ul><ul><li>They facilitate accumulation of capital and higher productivity thereby promoting economic growth </li></ul></ul></ul>
  3. 3. Listings on Local Exchanges: The Reality <ul><li>Throughout the Caribbean, firms choose to operate as privately held firms rather than as publicly held firms </li></ul><ul><li>Of the 28,621(CSO 2005) businesses operating in T&T, only 28 are listed in the TTSE </li></ul>
  4. 4. No. of Firms classified by Firm Size Source: Census of Establishment of the CSO. Trinidad and Tobago 100.0 28,621 Total No. of Firms 32.8 9,399 Unclassified 2.7 761 Over 50 persons Large Firms 2.3 660 25 to less than 50 persons Medium Sized Firms 13.7 3,923 5 to less than 25 persons Small Firms 48.5 13,878 Less than 5 persons Micro Enterprise Percentage of Total Number of Firms Classification* Description
  5. 5. The Reality (continued) <ul><li>Assuming that firms are not highly leveraged, an estimated 761 firms from the Table have the minimum level of Capital needed to be listed </li></ul><ul><li>Since only 28 domestic firms are listed, it means that 97% of these firms opt not to list </li></ul><ul><li>Interestingly, in large countries like the USA, UK and Canada, this phenomenon also prevails </li></ul>
  6. 6. 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 0.039 19 47,691 Barbados 0.074 36 48,528 Jamaica 0.087 25 28,621 Trinidad and Tobago 0.118 2,800 2,377,107 Canada 0.143 3,088 2,155,063 United Kingdom 0.027 1,539 5,767,127 United States % Listed No. of Listed Firms No. of Registered Firms Country
  7. 7. Reasons for lack of Listings on Local Stock Exchanges <ul><li>The reluctance of firms to list in the Caribbean is a result of three major issues </li></ul><ul><ul><ul><li>The legacy of legacy ownership of firms </li></ul></ul></ul><ul><ul><ul><li>The structure of the capital markets </li></ul></ul></ul><ul><ul><ul><li>The regulatory framework of the respective domestic capital markets and the perceived risks associated with using the local securities markets </li></ul></ul></ul><ul><ul><ul><li>The markets are non transparent and controlled by a few major market actors (interlocking directors) </li></ul></ul></ul><ul><ul><ul><li>The prohibitive cost of listing in the local stock exchanges </li></ul></ul></ul>
  8. 8. Interlocking Directorates and Market Capitalization: Trinidad and Tobago Source: TTSEC Report On Developments in the T&T Securities Market, 1997-2003 100% $49.7 100% $113.8 231 Total 12% $5.9 29% $32.6 186 Sitting on no more than one Board 21% $10.5 16% $18.7 35 Sitting on at most one other Board 67% $33.2 55% $62.5 10 Sitting on More than two Boards Percent of Total Market Capitalisation Market Capitalization of Companies ($TTB) Percent of Total Value of Assets Value of the Assets of the Companies (TT$B) No.of Directors Sitting Occurrence
  9. 9. Cross Border / Cross-Listings <ul><li>In the Caribbean, there are 123 listed companies (Guyana included). </li></ul><ul><li>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% </li></ul><ul><li>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. </li></ul>
  10. 10. SECTOR DISTRIBUTION OF THE JSE, BSE and TTSE SHOWS STRONG PRESENCE OF FINANCIALS Jamaica Trinidad Barbados Source: JMMB Securities Ltd. analysis 2003
  11. 11. Benefits of Cross-listing to the Company <ul><li>Investors can take advantage of cross rates, arbitrage trading and higher prices </li></ul><ul><li>The securities could create a larger and wider interest in the prosperity of the company </li></ul><ul><li>Easier access to future financing </li></ul><ul><li>Cross-listing expands business relationships </li></ul>
  12. 12. Benefits of Cross-Listing to the Investor <ul><li>The ability to diversify an investment portfolio </li></ul><ul><li>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 </li></ul><ul><li>Continuous listing on the Exchange means that reasonable and current information is available about the security </li></ul><ul><li>The securities will most likely have higher collateral value and should permit wider portfolio diversification, thus allow for financial planning </li></ul><ul><li>Protection against unreasonable commissions and low standards of business practice </li></ul><ul><li>Protection against violent fluctuation </li></ul>
  13. 13. Cross-Listings (continued) <ul><li>Notwithstanding these benefits of cross-listings, there are currently only thirteen cross-listed securities on five of the seven Stock Exchanges in the region. </li></ul><ul><li>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. </li></ul><ul><li>Since there are 118 ordinary securities listed on the exchange combined, the number of securities cross listed is a mere 11.02% </li></ul>
  14. 14. Identity of Cross-Listed Companies in CARICOM, 2005
  15. 15. CROSS LISTED STOCKS HAVE GROWN IN RECENT YEARS ACROSS THE TTSE, BSE and JSE Trinidad Barbados Jamaica 7 of 32 5 of 24 4 of 39
  16. 16. Cross Listed Securities on the TTSE 2.44 2.44 12.10.04 276,825,714 Dehring, Bunting & Golding Limited) 14.00 12.86 24.08.04 260,029,748 Sagicor Financial Corporation – (Merger of Life of Barbados and Barbados Mutual Life 2.50 1.55 21.11.03 2,466,762,828 National Commercial Bank of Jamaica 2.60 .84 01.10.03 584,500,000 Capital and Credit Merchant Bank Limited 1.65 .64 07.02.03 1,463,386,752 Jamaica Money Market Brokers Limited 9.50 8.65 22.11.02 1,478,870,312 First Caribbean International Bank Ltd - formerly CIBC (West Indies) Holdings Ltd 21.00 20.00 20.04.99 27,570,761 Barbados Shipping and Trading Co. Ltd 10.55 3.30 01.12.98 150,410,107 Grace Kennedy & Company Limited N/A 3.75 08.01.97 43,002,726 Life of Barbados Limited N/A 3.24 01.11.94 177,309,583 CIBC (West Indies) Holdings Limited Current Price (08.10.04) Listed Price (TTD) Date Listed Issued Share Capital Company
  17. 17. Challenges to Cross-Listings <ul><li>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 </li></ul>
  18. 18. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>Registering on a Regional Stock Market </li></ul><ul><ul><li>Different disclosure and listing requirements (SEC) </li></ul></ul><ul><ul><li>Different reporting requirement particularly as they relate to the periodicity of reporting </li></ul></ul><ul><ul><li>Different requirements with respect to restrictions on shareholding </li></ul></ul><ul><ul><li>Differences with respect to take over codes on the various stock exchanges </li></ul></ul>
  19. 19. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>Restrictions on shareholding </li></ul><ul><ul><li>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 </li></ul></ul>
  20. 20. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>Restrictions on shareholding </li></ul><ul><ul><li>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 </li></ul></ul>
  21. 21. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>Restrictions on shareholding </li></ul><ul><ul><li>State enterprises in Trinidad and Tobago which are listed in the stock exchange are allowed to have restricted shareholding </li></ul></ul>
  22. 22. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>Take Over Code </li></ul><ul><ul><li>The Take-Over Code is triggered in Barbados at 25% </li></ul></ul><ul><ul><li>Take-Over Code is triggered in Jamaica at 50% </li></ul></ul><ul><ul><li>Take-Over Code is triggered in Trinidad at 30% </li></ul></ul><ul><ul><li>There are presently several cross-listed companies </li></ul></ul>
  23. 23. CHALLENGES OF CROSS BORDER OPERATIONS <ul><li>With respect to the cross-listed companies, the following issue arises: </li></ul><ul><ul><li>Assume 49% of the issued share capital of a cross-listed company acquired in Jamaica </li></ul></ul><ul><ul><li>Assume further that the country’s home base is Barbados (where Take-Over code is triggered at 25% </li></ul></ul>
  24. 24. CHALLENGES OF CROSS BORDER OPERATIONS <ul><ul><li>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 </li></ul></ul><ul><ul><li>What are the implications? </li></ul></ul><ul><ul><li>Have the Laws been broken? </li></ul></ul><ul><ul><li>In which country has the law been broken? </li></ul></ul><ul><ul><li>What are the remedies? </li></ul></ul>
  25. 25. CHALLENGES OF CROSS BORDER OPERATIONS <ul><ul><ul><li>Some jurisdictions require Central Bank notification to facilitate the expatriation of capital (Fixed Exchange Rate Jurisdictions) </li></ul></ul></ul><ul><ul><ul><li>Some jurisdictions only allow registration to conduct business to investment grade banks </li></ul></ul></ul>
  26. 26. Need for a Coordinated Regulatory Approach <ul><li>The regulation of market participants including SRO’s </li></ul><ul><li>The raising of capital, whether by public offerings or a private placement </li></ul><ul><li>The issue of new securities as a result of employee bonus or share option schemes </li></ul><ul><li>Insider trading rules </li></ul><ul><li>Take-over rules </li></ul><ul><li>Compliance audits and inspections </li></ul>
  27. 27. Coordinated Approach (continued) <ul><li>Securities registrations </li></ul><ul><li>Listing obligations </li></ul><ul><li>Reporting obligations </li></ul><ul><li>Disclosure requirements </li></ul><ul><li>Corporate governance guidelines </li></ul><ul><li>Fee structures </li></ul><ul><li>The legal recognition of companies with fully dematerialized share registers </li></ul>
  28. 28. The Need For A Common Regulatory Approach <ul><li>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. </li></ul>
  29. 29. Broad Policy Requirements <ul><li>Caribbean markets require a number of policies initiatives designed to: </li></ul><ul><ul><ul><li>Ensure that listed companies follow best practice so as to encourage more firms to go public and apply for listing </li></ul></ul></ul><ul><ul><ul><li>Actively encourage more firms to cross-list regionally </li></ul></ul></ul><ul><ul><ul><li>Ensure that cross-border equity relationships and the ease of access to cross border money and capital markets are facilitated </li></ul></ul></ul>
  30. 30. For Firms to list Locally or Regionally <ul><li>Firms must understand the listing requirements in each markets </li></ul><ul><li>There must be adequate intermediary support </li></ul><ul><li>Interlocking directors should be minimized </li></ul><ul><li>There must be greater investor education programmes. </li></ul>
  31. 31. For Access to Cross-border markets <ul><li>There should be harmonization of company law, disclosure requirements, taxation policies </li></ul><ul><li>There should be an MOU to treat with the issue of listing fees </li></ul><ul><li>There must be cross-border supervision </li></ul><ul><li>There must be harmonized listing rules and trading procedures </li></ul><ul><li>Communication and technology harmonization is also crucial </li></ul>
  32. 32. THE END <ul><li>THANK YOU </li></ul>