Making the Stock Exchange work – Part 2

Today I continue the discussion on the Guyana Stock Exchange and what we might do to make it work. I believe that a vibrant stock exchange is an important vehicle to promote growth in the economy and to enable the small investor to share in the national economic pie.

This discussion on making our stock exchange work is more than some abstract financial concept, and relates to some useful initiatives in Jamaica which has one of the oldest exchanges in the region but which up to a couple of years ago had seen trading slowed to a crawl.

If we look at the banking statistics we realise how difficult it is for small and medium-sized enterprises (SME) to raise capital through commercial loans, both because they lack the necessary security to support their loan applications and because they have to pay rates of interest that are often beyond their reach.

The most recent Bank of Guyana report shows the prime lending rate by the commercial banks of 15.06% although a number of borrowers have been negotiating for much lower rates under the threat of taking their business elsewhere.

On the other hand the majority of savings deposit account holders receive interest of less than 3% per annum which is lower than the rate of inflation, even if we ignore the withholding tax of 20%. Part of this dichotomy lies in an examination of some other banking statistics. Table 2.14 of the Banking Statistics at December 31, 2010 shows under ‘Commercial Banks: Liquid Assets’ treasury bills of $64,401.1M, even though this conflicts with Table 2.17 which shows ‘Commercial Banks Holdings of Treasury Bills’ of $65,514.2M.

Add to that the sums of money held by the commercial banks with the Bank of Guyana as “Commercial Banks: Minimum Reserve Requirements”. This stands at $45,101.9Mn compared to a required level of $29,335.0Mn at December 31, 2010, an excess of $15,766.9M. So at the end of 2010 the commercial banks had invested in the government through Treasury Bills and reserve requirements close to $110 billion out of total deposits with them of $248 billion.

It is as if the banks are raising money for the government rather than intermediating funds within the private and business sector to which loans and advances at December 31, 2010 amounted to $76 billion.

In other words, of the deposits received by the commercial banks, the government holds Treasury Bills attracting interest of between 2.67% and 3.78% per annum while the Bank of Guyana holds funds from the banks as reserve requirements another $45 billion which attract no interest at all. On the other hand households and the business sector are loaned $75 billion with a prime rate of 15%! Of course there is small business and low cost housing lending which are at lower rates subsidised by the general tax laws.

I mentioned last week the mindless and costly policy of the government when it comes to managing the financial sector, and am again reminded that the commercial banks are caught between Scylla and Charybdis – the BoG has imposed such onerous lending and provisioning requirements and restrictions on the commercial banks as to discourage lending. These statistics require a separate study outside the scope of a newspaper column.

A viable option
The point is that if we could have an active stock exchange not only would bank depositors have an alternative and possibly better vehicle for their savings, but businesses would be able to access funds at a much lower cost of capital, a term that is common in financial management.

Of course, not all companies and particularly the start-ups are ready for the big time on the stock exchange, and they would not be able to compete with the bigger players. And that is the point about the junior stock exchange that has been working so successfully in Jamaica.

Down Jamaica way
But even the Jamaicans will tell you that they did not initiate the concept, and in their own preparations noted the success of the London Stock Exchange junior market – the Alternative Investment Market (AIM) and the Toronto Stock Exchange junior market – Venture X.

These junior markets allow investors to put capital into legitimate small and medium-sized companies that are listed. Experience from those exchanges has shown how the fundraising and development activities of the listed investment securities have been able to grow the local economy by creating established and transparent businesses, jobs and ultimately, economic confidence.

The Jamaican experience followed the same pattern. Within two years there were some nine companies listed on the junior market in Jamaica across the manufacturing, retail, tourism and finance sectors, and there are reportedly ten other companies preparing to enter the market.

For them the major attraction was lowering their cost of funds.

After only a couple of years Jamaica now has an active junior stock exchange with clear rules of entry and engagement, which despite a 92-page document are nothing too onerous.

In order to be admitted to the exchange a company must issue voting shares by way of an initial public offering, subject to a prospectus seeking a minimum subscription of new shares (or allotment of existing shares) of not less than J$50 million and not more than J$500 million only.

The exchange rate of the US dollar to the Jamaican dollar is approximately 85:1. If a company exceeds its maximum market capitalization of J$500 million, it will be required to list on the main JSE Board.

For the purpose of transparency, annual statutory audit, quarterly and annual reports are required in keeping with the submission requirements of the main exchange. The company must appoint to its board a mentor who is approved as ‘Fit & Proper’ by the Financial Services Commission, the equivalent of our Securities Council.

Companies which are not allowed to list on the junior exchange include a company which is wholly or partially a subsidiary of a registered entity on a recognized stock exchange and one which had been listed on the main board of the exchange.

Attracting SMEs to the exchange
It was recognised that SMEs would be attracted to the Junior Market based on the level of support which will be provided to them. Not all of the assistance was financial or fiscal. They could benefit from the Private Sector Development Programme, a technical assistance programme implemented jointly by the European Union and the Government of Jamaica.

Fiscal incentives included a tax incentive for a period not exceeding ten years from the date of listing on the JSE Junior Market as follows:

i. a full income tax holiday for five years after listing and a half income tax holiday for the remaining years;

ii. exemption from tax on dividends or other distributions by Junior Markets;

iii. exemption from transfer tax and stamp duty on transfers of shares in JSE Junior Market companies.

If the company de-lists within 15 years of being listed on the combined exchanges, it will be required to repay to the government the tax benefits enjoyed during this period.

An SME will enjoy the benefits of any approved tax incentive while on the Junior Market during the allowed incentive period. At the end of the allowed incentive period, the SME will be obligated to move to the main board of the JSE. If the SME decides after the period in which the tax holiday was granted not to list on the main board or to delist without compelling reasons, the SME must reimburse the government for the tax incentive provided.

The big challenge in Guyana to get private companies to bring in outside shareholders has to do with transparency, accountability, governance and tax issues. We have already noted that the lion’s share of corporation tax is paid by a handful of companies.

The names of several of our hardware suppliers, contractors and the politically connected or protected simply do not appear anywhere close.

They are busy gobbling up state assets and are oozing with liquidity.

They seem always bent on ensuring that everything is kept in the family. Governance for them applies only to the government and most of them do not bother with annual general meetings or filing annual returns, and they know that the GRA has only limited capacity to do a good audit.

Still a few of them willing to be pioneers and offering say 25% of their shares to the public could be enough to get a junior exchange started.

All the features of the Jamaican model may not be appropriate to us in Guyana. However they offer a template that could be modified to suit our peculiar needs and to attract entrants.

To continue to do nothing is hardly an option. It is time the government shows some interest in our Stock Exchange.

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