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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 l.jpg
ISSUES IN EQUITIES MARKET DEVELOPMENT AND INTEGRATION

  • BY

  • KELVIN SERGEANT

  • ECONOMIC CONSULTANT


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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


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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


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No. of Firms classified by Firm Size

Source: Census of Establishment of the CSO. Trinidad and Tobago


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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


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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


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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


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Interlocking Directorates and Market Capitalization: Trinidad and Tobago

Source: TTSEC Report On Developments in the T&T Securities Market, 1997-2003


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Cross Border / Cross-Listings Trinidad and Tobago

  • 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.


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SECTOR DISTRIBUTION OF THE JSE, BSE and TTSE SHOWS STRONG PRESENCE OF FINANCIALS

Barbados

Jamaica

Trinidad

Source: JMMB Securities Ltd. analysis 2003


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Benefits of Cross-listing to the Company PRESENCE OF FINANCIALS

  • 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


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Benefits of Cross-Listing to the Investor PRESENCE OF FINANCIALS

  • 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


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Cross-Listings (continued) PRESENCE OF FINANCIALS

  • 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%



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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



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Challenges to Cross-Listings TTSE, BSE and JSE

  • 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


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CHALLENGES OF TTSE, BSE and JSECROSS 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


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CHALLENGES OF TTSE, BSE and JSECROSS 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


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CHALLENGES OF TTSE, BSE and JSECROSS 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


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CHALLENGES OF TTSE, BSE and JSECROSS BORDER OPERATIONS

  • Restrictions on shareholding

    • State enterprises in Trinidad and Tobago which are listed in the stock exchange are allowed to have restricted shareholding


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CHALLENGES TTSE, BSE and JSEOF 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


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CHALLENGES OF TTSE, BSE and JSECROSS 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%


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CHALLENGES OF TTSE, BSE and JSECROSS 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?


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CHALLENGES OF TTSE, BSE and JSECROSS 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


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Need for a Coordinated Regulatory Approach TTSE, BSE and JSE

  • 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


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Coordinated Approach (continued) TTSE, BSE and JSE

  • Securities registrations

  • Listing obligations

  • Reporting obligations

  • Disclosure requirements

  • Corporate governance guidelines

  • Fee structures

  • The legal recognition of companies with fully dematerialized share registers


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The Need For A Common Regulatory Approach TTSE, BSE and JSE

  • 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.


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Broad Policy Requirements TTSE, BSE and JSE

  • 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


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For Firms to list Locally or Regionally TTSE, BSE and JSE

  • 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.


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For Access to Cross-border markets TTSE, BSE and JSE

  • 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


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THE END TTSE, BSE and JSE

  • THANK YOU


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