ISSUES IN EQUITIES MARKET ISSUES IN EQUITIES MARKET DEVELOPMENT AND INTEGRATIONDEVELOPMENT AND INTEGRATION

BYBY KELVIN SERGEANTKELVIN SERGEANT

ECONOMIC CONSULTANTECONOMIC CONSULTANT

The TheoryThe Theory Securities Market are important because:Securities Market are important because:

They allocate savings by way of investments in They allocate savings by way of investments in businesses and public enterprises which create businesses and public enterprises which create optimal expected returns to investorsoptimal expected returns to investors

They provide price formation mechanisms and They provide price formation mechanisms and set benchmarks for value in the economyset benchmarks for value in the economy

They promote efficiencies in business and public They promote efficiencies in business and public enterpriseenterprise

They facilitate accumulation of capital and higher They facilitate accumulation of capital and higher productivity thereby promoting economic growthproductivity thereby promoting economic growth

Listings on Local Exchanges: The Listings on Local Exchanges: The RealityReality

Throughout the Caribbean, firms Throughout the Caribbean, firms choose to operate as privately held choose to operate as privately held firms rather than as publicly held firms rather than as publicly held firmsfirms

Of the 28,621(CSO 2005) businesses Of the 28,621(CSO 2005) businesses operating in T&T, only 28 are listed in operating in T&T, only 28 are listed in the TTSE the TTSE

No. of Firms classified by Firm SizeNo. of Firms classified by Firm SizeDescriptionDescription Classification*Classification* Number of Number of

FirmsFirmsPercentage of Percentage of TotalTotal

Micro Micro EnterpriseEnterprise

Less than 5 Less than 5 personspersons

13,87813,878 48.548.5

Small FirmsSmall Firms 5 to less than 5 to less than 25 persons25 persons

3,9233,923 13.713.7

Medium Sized Medium Sized FirmsFirms

25 to less than 25 to less than 50 persons50 persons

660660 2.32.3

Large FirmsLarge Firms Over 50 personsOver 50 persons 761761 2.72.7

UnclassifiedUnclassified 9,3999,399 32.832.8

Total No. of Total No. of FirmsFirms

28,62128,621 100.0100.0

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

The Reality (continued)The Reality (continued) Assuming that firms are not highly leveraged, Assuming that firms are not highly leveraged,

an estimated 761 firms from the Table have the an estimated 761 firms from the Table have the minimum level of Capital needed to be listedminimum level of Capital needed to be listed

Since only 28 domestic firms are listed, it Since only 28 domestic firms are listed, it means that 97% of these firms opt not to listmeans that 97% of these firms opt not to list

Interestingly, in large countries like the USA, UK Interestingly, in large countries like the USA, UK and Canada, this phenomenon also prevails and Canada, this phenomenon also prevails

No. of Registered and Listed Firms:USA, No. of Registered and Listed Firms:USA, UK and Canada, 2004UK and Canada, 2004

CountryCountry No. of No. of Registered Registered FirmsFirms

No. of Listed No. of Listed FirmsFirms

% Listed% Listed

United StatesUnited States 5,767,1275,767,127 1,5391,539 0.0270.027

United KingdomUnited Kingdom 2,155,0632,155,063 3,0883,088 0.1430.143

CanadaCanada 2,377,1072,377,107 2,8002,800 0.1180.118

Trinidad and Trinidad and TobagoTobago

28,62128,621 2525 0.0870.087

JamaicaJamaica 48,52848,528 3636 0.0740.074

BarbadosBarbados 47,69147,691 1919 0.0390.039

Source: US Census Bureau; UK Gov’t Register of CO.; Canada Bus. Register; Regional Stock Exchanges and Registrars

Reasons for lack of Listings on Reasons for lack of Listings on Local Stock ExchangesLocal Stock Exchanges

The reluctance of firms to list in the Caribbean is The reluctance of firms to list in the Caribbean is a result of three major issuesa result of three major issues

The legacy of legacy ownership of firmsThe legacy of legacy ownership of firms

The structure of the capital marketsThe structure of the capital markets

The regulatory framework of the respective domestic capital The regulatory framework of the respective domestic capital markets and the perceived risks associated with using the local markets and the perceived risks associated with using the local securities marketssecurities markets

The markets are non transparent and controlled by a few major The markets are non transparent and controlled by a few major market actors (interlocking directors)market actors (interlocking directors)

The prohibitive cost of listing in the local stock exchangesThe prohibitive cost of listing in the local stock exchanges

Interlocking Directorates and Market Interlocking Directorates and Market Capitalization: Trinidad and TobagoCapitalization: Trinidad and Tobago

Sitting Sitting OccurrenceOccurrence

No.of No.of DirectorsDirectors

Value of the Value of the Assets of the Assets of the Companies Companies (TT$B)(TT$B)

Percent of Percent of Total Value Total Value of Assetsof Assets

Market Market CapitalizatioCapitalization of n of Companies Companies ($TTB)($TTB)

Percent of Percent of Total Market Total Market CapitalisationCapitalisation

Sitting on Sitting on More than More than two Boardstwo Boards

1010 $62.5$62.5 55%55% $33.2$33.2 67%67%

Sitting on at Sitting on at most one most one other Boardother Board

3535 $18.7$18.7 16%16% $10.5$10.5 21%21%

Sitting on no Sitting on no more than more than one Boardone Board

186186 $32.6$32.6 29%29% $5.9$5.9 12%12%

TotalTotal 231231 $113.8$113.8 100%100% $49.7$49.7 100%100%

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

Cross Border / Cross-ListingsCross Border / Cross-Listings

In the Caribbean, there are 123 listed In the Caribbean, there are 123 listed companies (Guyana included).companies (Guyana included).

Most of these 132 companies operate within Most of these 132 companies operate within the financial services sector which accounts the financial services sector which accounts for 32% of the listed firms while the for 32% of the listed firms while the manufacturing sector accounts for the second manufacturing sector accounts for the second highest number of firms, 26%highest number of firms, 26%

Interestingly, although tourism is a major Interestingly, although tourism is a major sector in most countries in the Caribbean, very sector in most countries in the Caribbean, very few firms in the tourism sector are listed. Only few firms in the tourism sector are listed. Only 13% of the firms in that sector are listed.13% of the firms in that sector are listed.

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

JamaicaJamaica TrinidadTrinidadBarbadosBarbados

16%

5%

68%

9%2%

0%

Conglom

Communi

Finance

Manufac

Retail

Tourism

Key Sector Value $USM ShareConglom 2,400 16.2%Communi 719 4.9%Finance 10,019 67.6%Manufac 1,383 9.3%Retail 230 1.6%Tourism 72 0.5%Total Portfolio 14,823$ 100.0%

18%

11%

63%

7% 1%0%

12%

4%

74%

8%1%

1% 18%

0%

68%

12%2%

0%

Source: JMMB Securities Ltd. analysis 2003

Benefits of Cross-listing to the Benefits of Cross-listing to the CompanyCompany

Investors can take advantage of cross Investors can take advantage of cross rates, arbitrage trading and higher rates, arbitrage trading and higher pricesprices

The securities could create a larger The securities could create a larger and wider interest in the prosperity of and wider interest in the prosperity of the companythe company

Easier access to future financingEasier access to future financing Cross-listing expands business Cross-listing expands business

relationshipsrelationships

Benefits of Cross-Listing to the Benefits of Cross-Listing to the InvestorInvestor

The ability to diversify an investment portfolioThe ability to diversify an investment portfolio

The comfort that the company was solvent, a going concern one The comfort that the company was solvent, a going concern one with a certain minimum amount of the securities in the hands of with a certain minimum amount of the securities in the hands of the publicthe public

Continuous listing on the Exchange means that reasonable and Continuous listing on the Exchange means that reasonable and current information is available about the securitycurrent information is available about the security

The securities will most likely have higher collateral value and The securities will most likely have higher collateral value and should permit wider portfolio diversification, thus allow for should permit wider portfolio diversification, thus allow for financial planningfinancial planning

Protection against unreasonable commissions and low standards Protection against unreasonable commissions and low standards of business practiceof business practice

Protection against violent fluctuationProtection against violent fluctuation

Cross-Listings (continued)Cross-Listings (continued) Notwithstanding these benefits of cross-listings, Notwithstanding these benefits of cross-listings,

there are currently only thirteen cross-listed there are currently only thirteen cross-listed securities on five of the seven Stock Exchanges in securities on five of the seven Stock Exchanges in the region.the region.

Of that number, 8 are cross listed securities on the Of that number, 8 are cross listed securities on the TTSE, 5 in Barbados, 4 in Jamaica and 2 in the TTSE, 5 in Barbados, 4 in Jamaica and 2 in the OECS. There are no cross listed securities in OECS. There are no cross listed securities in Guyana or Suriname.Guyana or Suriname.

Since there are 118 ordinary securities listed on Since there are 118 ordinary securities listed on the exchange combined, the number of securities the exchange combined, the number of securities cross listed is a mere 11.02%cross listed is a mere 11.02%

Identity of Cross-Listed Companies in Identity of Cross-Listed Companies in CARICOM, 2005CARICOM, 2005

Name of Cross-listed Company Home Exchange

Other Exchange on which Listed

Barbados Shipping and Trading Barbados Trinidad and Tobago BWIA* Trinidad and

Tobago Barbados

Capital and Credit Merchant Bank Jamaica Trinidad and Tobago Dehring, Bunting and Golding limited

Jamaica Trinidad and Tobago

First Caribbean International Bank Barbados Jamaica, Trinidad and Tobago the Bahamas , ECSE

Grace Kennedy & Co. Ltd. Jamaica Barbados, Trinidad and Tobago ,ECSE

Guardian Holdings Trinidad and Tobago

Jamaica

Jamaica Money Market Brokers Jamaica Trinidad and Tobago NCB Jamaica Jamaica Trinidad and Tobago

Neal & Massy Holdings Ltd. Trinidad and Tobago

Barbados

RBTT Financial Holdings Trinidad and Tobago

Barbados, Jamaica

Sagicor Barbados Trinidad and Tobago

Trinidad Cement Limited Trinidad and Tobago

Barbados, Jamaica

Source: Individual Stock Exchanges * Trade in the securities of this company is currently suspended at the request of the company in order for it to under go internal restructuring. This follows an unsuccessful Rights Offer in 2004. In July, 2004 the Government of Trinidad and Tobago spent US$40 million to purchase additional shares which private investors chose not to buy during a rights issue which resulted in the State regaining majority control of the airline.

CROSS LISTED STOCKS HAVE GROWN IN CROSS LISTED STOCKS HAVE GROWN IN RECENT YEARS ACROSS THE TTSE, BSE RECENT YEARS ACROSS THE TTSE, BSE

and JSEand JSETrinidadTrinidad BarbadosBarbados

JamaicaJamaica

JSE Cross Listed SectorFirst Carib. Intn'l Bank Ltd. FinanceGUARDIAN Hldgs. Ltd. FinanceRBTT FINANCIAL Hldgs Ltd. FinanceTRINIDAD CEMENT Ltd. Manufac

TTSE Cross Listed SectorBarbados Shipping & TradingConglomFirst Carib. Intn'l Bank Ltd. FinanceGrace Kennedy Ltd. ConglomSagicor Ltd. (Pending) FinanceJMMB Ltd. FinanceCCMB Ltd. FinanceNCB Ltd. Finance

BSE Cross Listed SectorBWIA Airways ManufacGrace, Kennedy & Co. Ltd ConglomNeal & Massy ConglomRoyal Bank T&T Limited FinanceTrinidad Cement Limited Manufac

7 of 32 5 of 24

4 of 39

Cross Listed Securities on the TTSECross Listed Securities on the TTSE

CompanyCompany Issued Issued Share Share CapitalCapital

Date Date ListedListed

Listed Listed PricePrice

(TTD)(TTD)

Current Current PricePrice

(08.10.04)(08.10.04)

CIBC (West Indies) Holdings LimitedCIBC (West Indies) Holdings Limited 177,309,583177,309,583 01.11.9401.11.94 3.243.24 N/AN/A

Life of Barbados LimitedLife of Barbados Limited 43,002,72643,002,726 08.01.9708.01.97 3.753.75 N/AN/A

Grace Kennedy & Company LimitedGrace Kennedy & Company Limited 150,410,107150,410,107 01.12.9801.12.98 3.303.30 10.5510.55

Barbados Shipping and Trading Co. LtdBarbados Shipping and Trading Co. Ltd 27,570,76127,570,761 20.04.9920.04.99 20.0020.00 21.0021.00

First Caribbean International Bank Ltd - First Caribbean International Bank Ltd -

formerly CIBC (West Indies) Holdings Ltdformerly CIBC (West Indies) Holdings Ltd1,478,870,311,478,870,31

2222.11.0222.11.02 8.658.65 9.509.50

Jamaica Money Market Brokers LimitedJamaica Money Market Brokers Limited 1,463,386,751,463,386,7522

07.02.0307.02.03 .64.64 1.651.65

Capital and Credit Merchant Bank LimitedCapital and Credit Merchant Bank Limited 584,500,000584,500,000 01.10.0301.10.03 .84.84 2.602.60

National Commercial Bank of JamaicaNational Commercial Bank of Jamaica 2,466,762,822,466,762,8288

21.11.0321.11.03 1.551.55 2.502.50

Sagicor Financial Corporation – Sagicor Financial Corporation – (Merger of (Merger of Life of Barbados and Barbados Mutual LifeLife of Barbados and Barbados Mutual Life

260,029,748260,029,748 24.08.0424.08.04 12.8612.86 14.0014.00

Dehring, Bunting & Golding Limited)Dehring, Bunting & Golding Limited) 276,825,714276,825,714 12.10.0412.10.04 2.442.44 2.442.44

Challenges to Cross-ListingsChallenges to Cross-Listings

The challenges to cross-listing The challenges to cross-listing revolve around listing and revolve around listing and compliance requirements as well as compliance requirements as well as the entire legislative framework of the entire legislative framework of the jurisdictions in which the firms the jurisdictions in which the firms operateoperate

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

Registering on a Regional Stock MarketRegistering on a Regional Stock Market

• Different disclosure and listing Different disclosure and listing requirements (SEC)requirements (SEC)

• Different reporting requirement Different reporting requirement particularly as they relate to the particularly as they relate to the periodicity of reportingperiodicity of reporting

• Different requirements with respect to Different requirements with respect to restrictions on shareholdingrestrictions on shareholding

• Differences with respect to take over Differences with respect to take over codes on the various stock exchangescodes on the various stock exchanges

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONSCROSS BORDER OPERATIONS

Restrictions on shareholdingRestrictions on shareholding

• The Barbados Stock Exchange allows The Barbados Stock Exchange allows publicly traded companies to place in publicly traded companies to place in their bye-laws provisions which restrict their bye-laws provisions which restrict individuals from holding over and individuals from holding over and above a certain amount of issue share above a certain amount of issue share capital of a public companycapital of a public company

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

Restrictions on shareholdingRestrictions on shareholding

• The Trinidad and Tobago Stock The Trinidad and Tobago Stock Exchange by contrast requires that any Exchange by contrast requires that any such restriction be removed before a such restriction be removed before a company may be listed although there company may be listed although there is a discretion to allow the listing is a discretion to allow the listing notwithstanding the prohibitionnotwithstanding the prohibition

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

Restrictions on shareholdingRestrictions on shareholding

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

CHALLENGESCHALLENGES OF OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

Take Over CodeTake Over Code• The Take-Over Code is triggered in The Take-Over Code is triggered in

Barbados at 25%Barbados at 25%• Take-Over Code is triggered in Take-Over Code is triggered in

Jamaica at 50%Jamaica at 50%• Take-Over Code is triggered in Take-Over Code is triggered in

Trinidad at 30%Trinidad at 30%• There are presently several cross-There are presently several cross-

listed companieslisted companies

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

With respect to the cross-listed With respect to the cross-listed companies, the following issue companies, the following issue arises:arises:• Assume 49% of the issued share Assume 49% of the issued share

capital of a cross-listed company capital of a cross-listed company acquired in Jamaicaacquired in Jamaica

• Assume further that the country’s Assume further that the country’s home base is Barbados (where Take-home base is Barbados (where Take-Over code is triggered at 25%Over code is triggered at 25%

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONSCROSS BORDER OPERATIONS

• Assume that a further 10% of the issued Assume that a further 10% of the issued capital is bought either by the same capital is bought either by the same company, a subsidiary or an affiliate or company, a subsidiary or an affiliate or the floor of the Trinidad stock exchangethe floor of the Trinidad stock exchange

• What are the implications? What are the implications? • Have the Laws been broken?Have the Laws been broken?• In which country has the law been In which country has the law been

broken?broken?• What are the remedies?What are the remedies?

CHALLENGES OF CHALLENGES OF CROSS BORDER OPERATIONS CROSS BORDER OPERATIONS

Some jurisdictions require Central Some jurisdictions require Central Bank notification to facilitate the Bank notification to facilitate the expatriation of capital (Fixed expatriation of capital (Fixed Exchange Rate Jurisdictions)Exchange Rate Jurisdictions)

Some jurisdictions only allow Some jurisdictions only allow registration to conduct business to registration to conduct business to investment grade banksinvestment grade banks

Need for a Coordinated Regulatory Need for a Coordinated Regulatory ApproachApproach

The regulation of market participants The regulation of market participants including SRO’sincluding SRO’s

The raising of capital, whether by public The raising of capital, whether by public offerings or a private placementofferings or a private placement

The issue of new securities as a result of The issue of new securities as a result of employee bonus or share option schemesemployee bonus or share option schemes

Insider trading rulesInsider trading rules Take-over rulesTake-over rules Compliance audits and inspectionsCompliance audits and inspections

Coordinated Approach Coordinated Approach (continued)(continued)

Securities registrationsSecurities registrations Listing obligationsListing obligations Reporting obligationsReporting obligations Disclosure requirementsDisclosure requirements Corporate governance guidelinesCorporate governance guidelines Fee structuresFee structures The legal recognition of companies with The legal recognition of companies with

fully dematerialized share registersfully dematerialized share registers

The Need For A Common The Need For A Common Regulatory ApproachRegulatory Approach

A common regulatory framework is the A common regulatory framework is the necessary bedrock for establishing a necessary bedrock for establishing a regional stock exchange system, regional stock exchange system, regardless of which one of the mechanism regardless of which one of the mechanism is chosen; an enhanced system of cross-is chosen; an enhanced system of cross-listing and cross-trading; electronically listing and cross-trading; electronically based inter connectivity between the based inter connectivity between the existing stock exchanges; and a single existing stock exchanges; and a single regional stock exchange; using as its regional stock exchange; using as its platform one of the existing stock platform one of the existing stock exchanges.exchanges.

Broad Policy RequirementsBroad Policy Requirements

Caribbean markets require a number Caribbean markets require a number of policies initiatives designed to:of policies initiatives designed to:

Ensure that listed companies follow best Ensure that listed companies follow best practice so as to encourage more firms to go practice so as to encourage more firms to go public and apply for listingpublic and apply for listing

Actively encourage more firms to cross-list Actively encourage more firms to cross-list regionallyregionally

Ensure that cross-border equity relationships Ensure that cross-border equity relationships and the ease of access to cross border and the ease of access to cross border money and capital markets are facilitatedmoney and capital markets are facilitated

For Firms to list Locally or For Firms to list Locally or RegionallyRegionally

Firms must understand the listing Firms must understand the listing requirements in each marketsrequirements in each markets

There must be adequate There must be adequate intermediary supportintermediary support

Interlocking directors should be Interlocking directors should be minimizedminimized

There must be greater investor There must be greater investor education programmes.education programmes.

For Access to Cross-border For Access to Cross-border markets markets

There should be harmonization of There should be harmonization of company law, disclosure requirements, company law, disclosure requirements, taxation policiestaxation policies

There should be an MOU to treat with the There should be an MOU to treat with the issue of listing feesissue of listing fees

There must be cross-border supervisionThere must be cross-border supervision There must be harmonized listing rules There must be harmonized listing rules

and trading proceduresand trading procedures Communication and technology Communication and technology

harmonization is also crucialharmonization is also crucial

THE ENDTHE END

THANK YOUTHANK YOU