The Stock Market Share Price Mystery and Conflict of Interest
Beginning with the exchange between the Chairman and a shareholder at Banks DIH Limited Annual General Meeting held on 27 January 2024, there appears to have been much interest in the share prices of public companies. In fact, this writer holds the view that because of a quirk in how prices of shares are determined on the Stock Exchange; the terrible illiquidity in the marketplace for shares, the awful and inexplicable dividend policy of companies and the lack of investment opportunities, the demand for the few shares offered for sale, the prices of the shares of several of the companies cannot be easily justified.
Here is a picture of the share price movements of eight of the public companies over the period January 2019 to December 2023. With an acknowledged anomaly in the shares of Caribbean Container Inc.(see S/N letter column of 8 February, 2024, I consider it prudent to exclude the figures for that company.
Source: Guyana Stock Exchange website
Expressed another way, according to the Stock Exchange website the overall capitalisation of the stock market between the two dates moved from $301,412 Mn. to $819,884 Mn. or 172%. What is clear is that for some reason the market has begun an adjustment moving from a $1,062,213 Mn. in July 2022 to $819,884 Mn. in December 2023, a decline of 23%.
If in fact, this trend continues, the consequences can be severe for pension funds and insurance companies which would be undesirable. The people who are best placed to bridge the gap between what might be a realistic price and the traded price are those companies which have been hoarding profits instead of rewarding shareholders for their loyalty and who have been funding their capital programmes out of retained profits, such as DDL and others who have large liquid balances, including with their banks, such as Banks DIH.
Another possibility is for companies to buy back their shares as permitted under the Companies Act, a practice largely unknown in Guyana. Another possibility is for the commercial banks to pay a more economic rate of interest on deposits. Currently, if shareholders were to take advantage of the share price bubble and sell their shares, there are few alternative saving or investment opportunities. It was part of the PPP/C mantra that commercial banks should start narrowing the spread between the interest they pay and the interest they charge as the Bank of Guyana has had some success with trading in foreign exchange.
This column will be monitoring developments over the next few months as public companies publish their financial statements and shareholders and the public get a better understanding of their operations. For now, I will do a brief overview of the framework in place for the regulation of public companies.
The most basic of these is the Companies Act under which local companies are incorporated here while foreign companies can either incorporate in Guyana or register as a branch. The Bank of Guyana is also the regulator for both the banking sector and the insurance sector. All public companies must also comply with the Securities Industry Act which creates the Securities Council to exercise oversight over them.
Then there is the Guyana Stock Exchange which provides a platform for the trading of shares in public companies. The Stock Exchange is a private company which operates through a handful of member firms – Trust Company (Guyana) Ltd, Guyana Americas Merchant Bank Inc, Beharry Stockbrokers Ltd and Hand-in-Hand Trust Corporation Inc.
This seems to pose an immediate conflict of interest, something that is anathema in the financial world but all too familiar and widely accepted in Guyana. Trust Company has a very, very close relationship with DDL, Hand – Hand Trust with Banks DIH and Guyana Americas Merchant Bank Inc, Beharry Stockbrokers Ltd with the Beharry Group which includes two public companies – GBTI and Sterling Products Limited..
The apparent conflict does not end there. Trust Company and Hand – in – Hand Trust also manage pension funds which hold significant investments in public companies. If there was a major realignment in share prices, they would have some serious questions to answer.
Next week, we will look at the dividend policies of these public companies and why we think they companies can pay mush higher dividends.
One of our other public companies – Caribbean Container Inc. (CCI) – seems to have an even more serious problem with its share price than Banks DIH Limited does. Between the Stock Exchange (GASCI) trading session 1007 on 20 February 2023 and trading session 1057 on 5 February 2024, the price of CCI’s shares has skyrocketed from $40 to $200. There is nothing in the fundamentals of that company (see Table below) that could conceivably justify anything close to this 400% increase in the share price over a 1-year period. In fact, if we go back one year earlier to 27 June 2022 when the price was $15, the increase is a staggering 1,233%!
The only noteworthy development in the Company is the leasing of part of its property which will generate a steady flow of income in the immediate future.
Source of Information: Annual Reports and GASCI Website
The principal shareholders in the company are Demerara Holdings Inc., whose ultimate beneficial owner is the estate of its former Managing Director, which owns 85.92% of CCI’s shares, and Secure International Inc., a Beharry Group company which owns 5.16%. The Securities Industry Act requires disclosure of 5% or more.
The number of shares traded between February last year and this month to date, was 66,400 and between 27 June 2022, that number was 90,200. For completeness, the average number of shares traded over eighteen sessions was 3,688 shares. This represents just 0.059 % of the 150,916,595 shares in issue. It ought not to be that transactions involving 0.059% of shares in issue can move the share price by 1,233%! While this is an extreme case, such distortions are not unique to CCI as the trading records of DDL and Banks DIH show.
I am not suggesting any insider dealing or other improper conduct on the part of any person, including CCI’s management. But rather that something is wrong with the working of our Stock Exchange, its shareholdings, market participants and shareholder and investor education. There is a lot of blame to go around, including misleading information in annual reports and peddled by chairpersons of public companies.
Part of the solution lies in meaningful reform but efforts to get successive governments to pay attention to both GASCI and the Securities Exchange have produced little or no fruit. I am hopeful that the recent comments published in the Stabroek News on Banks DIH Inc. and now this extreme disclosure will stir the powers that be into some meaningful action.
An immediate course of action would be for the Stock Exchange to immediately suspend trading of shares in this company, and to make inquiries and appropriate recommendations. We cannot at the same time boast of a world class economy and have an imperfectly functioning Stock Exchange.
Banks DIH Limited, one of Guyana’s oldest and most prominent public companies held its 68th. Annual General Meeting on 27 January 2024. Executive Chairman Clifford Reis presented the report of the Directors for the year ended 30 September 2023. Banks, as it is popularly known, is actually a group of companies comprising the food and beverage giant and Citizens Bank Limited in which it has a 51% interest. More recently, the company incorporated a 100%-owned Banks Automotive and Services Inc. which reported a profit of $9.2 Mn. in 2023. The group as a whole reported a profit before tax of $14,509 Million which was an increase of 8.3% over 2022.
Key shareholders in the company include Demerara Life Group of Companies (11.4%), Trust Company (Guyana) Limited (8.7%), Banks Holdings (Barbados) Limited (5.9%) and the Hand-in-Hand Group of Companies (5.5%). Banks has eleven directors, the majority of whom – including two women – are non-independent executive directors reporting to a CEO who is also the Chairman of the board. Banks DIH and DDL have been known to resist any attempt at separating these roles, considered a feature of good corporate governance under most international Codes of Corporate Governance.
From all accounts, the AGM was proceeding sedately until, according to a report in the online news outlet, a shareholder indicated that he planned to invest more in the company but questioned why “the Company’s share price was not moving in tandem with all the positive things that were happening.” That question appears to have triggered quite an emotive response from Chairman Reis who expressed strong dissatisfaction about the Guyana Stock Exchange itself, the role of brokers, the size of trades and the influence of small trades on the price of traded shares. Mr. Reis even suggested that brokers have sold five shares in violation of the Company’s By-Laws.
Mr. Reis would not make such a public statement if he did not have actual knowledge of those transactions and he has every right to be upset that the most recent trade price – no matter how small – becomes the new price. He knows too that in Business Page columns I wrote over several years (these are available at chrisram.net), I advocated for a reform of that practice. His Company was silent on the call because it also came with a call for a Corporate Governance Code which both Banks and DDL have stoutly resisted. Where I do believe Mr. Reis went overboard in his expansive response to the shareholder was in describing as “amazing,” 80,000 shares being sold between twenty-five persons, an apparent heresy in Reis’ view because a number of the sellers did so “without any hard financial evidence”. Mr. Reis would be doing us all a favour in providing any reference to the By-Laws of any public company in Guyana or to the Companies Act of Guyana of such a requirement.
That was not the only problem I have with Mr. Reis’ response. He practically boasted about the Company’s ability “to develop the company with all this capital works without borrowing and selling shares.” The fact that the company can do this is a direct result of the company’s dividend policy in which the directors pay shareholders a negligible share of the annual profit available for distribution.
Banks DIH Limited Group Performance Summary September 2019 – September 2023
Source: Annual Reports of Banks DIH and GASCI website
What is worse is that as the Table below shows, there is such an eerie consistency around 20% as to suggest that that is no accident – but a policy which directors are either unable or afraid to question. Moreover, that ratio is in fact the lowest among major public companies in Guyana, although again, only slightly less than DDL. It is amazing that Mr. Reis would overlook such an important determinant in the price of his company’s shares.
As a consequence of this policy, the Company fails in another significant indicator, i.e., the dividend yield, which shows how much a company pays out in dividends each year relative to its stock price. He might take some comfort that by this measure, Banks actually outperforms DDL and Demerara Bank but lags far behind Demtoco, GBTI and Republic Bank. Ironically, had the share price been higher, the dividend yield would actually be even lower.
There is no intrinsic virtue in the Company financing out of retained earnings all its investment requirements. One of the things one learns in an MBA Finance programme is that equity, including retained earnings, is generally more expensive than debt. One has to believe that equity is cheap to believe that financing all investments out of equity and distributable reserves is something to be proud of. What a low payout ratio assumes is that the company will more profitably re-invest the profit than shareholders would, despite dividends being tax-free. Sadly, that misplaced confidence, or arrogance, is not limited to Banks DIH.
Mr. Reis laments the company’s share price movement which has swung by 2.6 % in 2020, 50% in 2021, 58.3% in 2022 and negative 7.8% in 2023. There was nothing in the fundamentals of the Company to justify the significant increases in 2021 and 2022, two years in which share prices across the board rose by 46% and 70% respectively. Mr. Reis did not question those increases but now raises doubts about the 2023 change of negative 7.8%, ignoring the negative 23.2% change in the market as a whole.
Some years ago, the directors decided that dividends would be paid in three tranches, two interims of around $0.40 per share and a final dividend of about $1.20 per share. Whatever may have been the intention, that decision makes poor sense. An interim dividend of $0.40 per share to someone who holds 5,000 shares amounts to $2,000 but carries a significant transaction cost both to the company and the shareholder. For a shareholder resident abroad, not only will the net remittance after withholding tax substantially erode the dividend, but some banks have a floor on the amount they will transfer on any single transaction. Such shareholders also bear the risk of a creeping exchange devaluation. In these circumstances, I fail to see any financial or economic reason even a medium-sized non-resident shareholder would want to hold on to their shares in this company.
It should not be so amazing that persons with small numbers of shares sell their shares – they become like stranded assets, but the CEO thinks there is something amiss!
Mr. Reis made a big play about the Company’s expansion programme and its acquisition of forty acres of land and a new bottling plant for US$71 Mn. The truth is that the Company has in fact been replacing fixed assets as line 8 of the Table shows. On that score, the profit before tax (PBT) has increased at a faster rate than average total assets for a number of years, but one must remember that PBT is based on current values while a major part of total assets is usually stated at historical cost. What is particularly troubling however, is the wide disparity between the 17.3% increase in total assets and the comparatively modest increase of 8.3% in profit before tax in 2023.
On page 15 of the 2023 Annual Report, the Directors – not the Chairman – discussed a new holding company which will subsume and change the public status of the existing company as it has been since 1955, making it a subsidiary with only one shareholder. Under this arrangement, shareholders in the existing company will exchange their shares for shares in the new holding company. According to the Directors, this step would allow the Group to enter into new activities arising from the present rapid development in Guyana and is “taken pursuant to the advice of a reputable accountable firm BDO.” I am not convinced about the wisdom and benefit of this decision, but rather consider it adventurous and poorly conceived. The existing structure has not prevented the Group from investing in a new company costing hundreds of millions of dollars and can similarly undertake several others.
The misguided, incorrect and flawed response by the Chairman makes , absolutely necessary. a reconsideration of the decision to have a new holding company with all its ramifications. If anything, my view is that the shares of Banks DIH are currently overvalued but that the problems are not insoluble. Get governance right, address the fundamentals, have regard to the interest of the shareholders and not only the company, practise some informed corporate democracy and execute judiciously, and Banks can once again be the pacesetter.
I agree that we need to address the issues of GASCI and the Securities Council to make them function more efficiently. Public companies can help in this process if they cooperate with GASCI and the Securities Council rather than treating these bodies as enemies to be confronted. And at all costs, we must never return to the days when senior officers of public companies engaged in self-dealing, insider trading and price manipulation.
The Minister of Finance has kept his Budget Speech promise to come back to the National Assembly to a) raise the debt ceiling b) to revise upward the NRF withdrawal rule and c) saving an increasing share of the inflows into the Fund. Earlier yesterday, via the Fiscal Enactments (Amendment) Bill 2024 – a format which is typically utilised for amendments to tax legislation – the Minister delivered more than even his most optimistic supporter would have expected.
As the Table below shows, the Minister has increased the borrowing ceiling for Public (Domestic) Loans by 100% from G$750,000 Mn. to G$1,500,000 Mn. and the borrowing ceiling for External Loans by 66.7% from G$900,000 Mn. to G$1,500,000 Mn.
Debt Ceiling – Guyana Millions of Dollars
Years
Pre 2021
2021
2022
2023
2024
% increase 2020/ 2024
Domestic
150
500
500
750
1,500
900
External
400
650
650
900
1,500
275
It means that since the PPP/C came to power in August 2020 they have increased the domestic debt ceiling by 900% and the external debt ceiling by 275%. By any measure, even for the fastest growing economy in the world, these are staggering increases, with obvious consequences. The domestic debt reported in the Budget Speech at December 2023 was $569,913 Mn. which means that he can borrow as much as $931,000 Mn. more on the domestic market. The 2024 Budget showed that the Government proposes to borrow in 2024 some $189,522 Mn. (net) from the domestic market and $206,394 Mn from external sources.
The Minister is giving himself a massive borrowing space both from local and external sources. It would be interesting to see the private sector responds to this proposal which can crowd out local borrowings and possibly carry up the cost of capital.
The NRF
Contrary to the statement in the Budget Speech, the proposal by the Minister to increase the automatic withdrawals from the NRF will significantly reduce what is left for intergenerational savings and for expenditure stability in periods of downturn. To give one simple example, after US$2,000 Mn. of earnings from profit share and royalty, only US$50 million would be saved under the new arrangement, compared with US$750 million under the replaced formula. Let us take it further but expressed another way, savings of US$1,710 million would have been saved from earnings of US$3,000 Mn. under the existing system. Under the new proposal it would require earnings of US$6,000 Mn.!
The Minister has delivered on his promise to increase the borrowing ceilings and NRF withdrawals. Understandably, he has not been able to achieve the trick of withdrawing more and saving more at the same time.
Ram & McRae expressed concern in its Budget Focus that it is dangerous for any Government to treat the NRF like some ordinary piece of legislation. Sadly, that fear has been realised.
We recall from Column 119 that while the tax is paid by the Government of Guyana, the oil companies receive from the Guyana Revenue Authority ‘proper tax certificates’ in their names. These certificates are not some paper transactions but grant to the oil companies real economic value and substance since they produce them with their tax returns in their home countries as evidence of having paid those taxes and received a credit therefore. Just as a reminder, the current tax rate applicable to oil companies as a non-commercial company is 25% of their taxable profit.
Other tax goodies
This brings us to another tax benefit. Under Guyana tax laws, subject to any Double Taxation Agreement – which in any case does not apply to any of the oil companies – the remittance or deemed remittance of profits is subject to a withholding tax of 20%. The benefit of the exemption from withholding tax – for itself and its affiliated companies, (cousins and all!) – which is seen from this simple example: a Guyanese resident abroad who owns and leases her house in Guyana for an annual rental of G$100,000 will have to bear Withholding Tax of $20,000 on that amount. If for some reason, the Government agrees not to enforce that obligation, that person benefits from $20,000 – without a receipt! The value of the receipt is an additional benefit.
The 2016 Agreement provides that the oil companies are not subject to any “tax, duty, fee, withholding, charge or other impost, applicable on interest payments, dividends, dim dividends, transfer of profits or deem remittance of profits from contractors, affiliated companies or non-resident subcontractors branch in Guyana to its foreign or head office or to affiliated companies.”
As shown in the table, the value of that benefit is 20% of the 75%, or 15% .
Exclusive of the corporation tax receipt to the Government (into the Consolidated Fund from the Natural Resource Fund), but inclusive of the tax benefits to the oil companies, the Government gets 39.5% and the oil companies get 90%. If we include the tax receipt to the Government, the Government gets 52% while the oil companies benefit to the tune of 90%.
As the Table shows, regardless of what is included or excluded, the oil companies receive far more from their operations in Guyana than the Government of Guyana does, ranging from 1:1.6 to 1:2.3. Or we can put it another way. For every barrel of oil Guyana gets, the oil companies can receive twice as many. Regardless of how it is computed, or what is included or excluded, our total gross share is 9.1%. It is simply amazing that any Guyanese would accept, let alone defend this atrocity.
Net versus gross
One final point. The receipts by the Government are gross of expenses. The oil companies walk away with pure economic value, including the cash proceeds from their share of profit oil. Out of its earnings, the Government has to meet all the expenses of the administration and oversight of the sector. These include the Ministry of Natural Resources, the Environmental Protection Agency, the ministerial audit, the use of the court system to fight Guyanese seeking a fairer deal and better contract administration.
This in no way is intended to suggest that the country has not benefitted from the production of oil. One only has to look at the national budget of which oil revenue accounted for 36% of budgeted revenues in 2023, and significant foreign exchange earnings from which the country benefits. Against these, the economist would consider the externalities arising from oil production. But that is outside the scope of column written by an accountant.
The debate of 50:50 profit share has blinded Guyanese about the obnoxious scale of generosity offered to Exxon and why it is so resistant to talk of renegotiation. Not only do the oil companies not pay any Corporation Taxes, but they walk away with a certificate for the taxes and are exempted from any taxes in Guyana – right up to 2057! Given that this is a post-discovery contract which should not have been awarded in the first place, it might possibly be the worst oil contact ever!
When Exxon threatened Newell Dennison in April 2016 at its Texas campus with no investment without a new Agreement, these were the benefits it wanted to secure. When Brooke Harris, Exxon’s top official, was bombarding Trotman and Legal Officer Ms. Joanna Homer of the Ministry of Natural Resources Ministry, with emails, the objective was no different. When Harris drafted the Cabinet Paper for Trotman, it was no different. And when Exxon complained to Granger that Trotman was having “misgivings”, Granger was blind to Exxon’s objective and the consequences for Guyana.
Over time, the media have unmasked the travesty with which the Granger Administration has shackled Guyana for more than a generation. It can be no excuse that the model used for the 2016 Agreement originated from then President Donald Ramotar and Natural Resources Minister Robert Persaud. To overcome the inconvenience that no oil company could get a second agreement over blocks already relinquished, it is highly unlikely that Exxon and some of our own people, did not have a hand in the concoction called the bridging deed. On top of all of these, Trotman unwisely used a pre-discovery model agreement for post-discovery circumstances. That was a most unforgivable and catastrophic error by the APNU+AFC.
Conclusion
The advertisement by Exxon reproduced in column 119 is more than mere distortions and propaganda. It is an insult to the senses and sensibilities of Guyanese. Not even the British colonisers ever boasted of “building Guyana”. Here, the greatest coloniser of all, aided, abetted and enabled by the current Government telling us that they are building Guyana. They are indeed, if by “building Guyana they mean exploiting our country’s natural resources for a measly 2% royalty, paying no taxes, forcing our government into an international conspiracy to defraud the US IRS, demands absolute security and protection while posing grave risks to the environment and eroding the country’s reputation as a protector of the environment.
I close with this thought. Would a counter-billboard to that placed by Exxon to rebut Exxon’s deception be permitted by the Demerara Harbour Bridge?
