May 2008 Financial News

Depository receipts set for July launch

May 01, 2008

“It’s the next best thing since sliced bread.”

That was Osbourne Nurse’s enthusiastic description of a new investment instrument expected to hit the local market in late July.

The chairman and chief executive officer of the T&T Securities Exchange Commission (SEC), was referring to the depository receipt programme being developed by the SEC.

Nurse was speaking on April 18, at the Marriott Courtyard hotel, Audrey Jeffers Highway, Port-of-Spain, to a group of journalists assembled for a briefing on how the new investment instrument will work.

Nurse said DRs would, for the first time, give local investors the chance to invest in the energy sector which makes the largest contribution to the T&T economy.

The opportunity to introduce the new security is coming as an adjunct to the sale of RBTT to the Royal Bank of Canada (RBC), a decision approved by RBTT shareholders at a special shareholders meeting in March.

RBC plans to delist the RBTT shares from the T&T Stock Exchange. In talks with SEC executives, RBC agreed to replace the RBTT shares with depository receipts based on RBC stock.

The RBC buyout of RBTT is expected to be concluded this month and some $7.5 billion to be paid out to shareholders thereafter. The SEC is hoping to have the first DRs in the market to coincide with those payments.

Nurse said stockbrokers have expressed keen interest in getting into the DR business. In fact, he told journalists at the briefing that he knows at least four “parties” which have indicated that they will be issuers of DRs when the market comes into being.

“It could be very successful,” he said, adding, “I think people will have to be very careful about what they want to buy.”

The first DR will be based on stocks of RBC. The SEC is hoping that other companies— such as bpTT and BGTT—will also want to issue DRs of their stocks.

Sponsored or unsponsored DRs

There will be two kinds of DR’s: One option will be a sponsored DR programme in which a foreign company decides to issue DRs on its shares in the local market. The other would be an unsponsored programme in which the foreign company is not involved, but a local agent purchases the company’s shares and issues the DRs.

The SEC said there is no set formula for how the DRs will be derived from the underlying stocks on which they are based. Each one will have to be determined and priced on a case-by-case basis. However, officials hoped the prices would be set at such a level to encourage sales.

DRs would give investors a fractional interest in a foreign stock.

Nurse called it “an excellent developmental initiative.”

An investor who wants to buy a depository receipt will go to a broker, just as he/she does at present, and place an order.

The broker will issue the DRs either based on stocks which he already has in his possession or if he has none, he will take the order and make arrangements to buy the stocks on an international stock market.

The companies whose stocks are to be used as the basis for depository receipts must be registered in an approved jurisdiction. For the time being, the approved jurisdictions are the US/UK and Canada.

The companies must be in good standing in their registered jurisdictions and their securities must have sufficient market capitalisation to guarantee their liquidity and ensure that the shares can be bought and sold daily without any difficulty.

The SEC has decided that to be accepted for the creation of DRs, the foreign company must have a minimum capitalisation of US$1 billion and have 10 million shares trading daily.

One of the keys to the success of the programme will be tax exemption for the dividends earned by investors.

The SEC said that under existing rules, dividends from local investments are not taxed at the point when they are received by the investor. The SEC is recommending tax exemption on dividends from foreign investments to put DRs on the same level as local securities.

SEC executives said the stock exchange will have to make certain changes in its rules to accommodate the new business. They hoped those changes would lead to easier and more effective trading on the stock market.

Nurse said the DR business will help in the country’s quest to develop an International Financial Centre. It will do this by providing a service that could be made available to the rest of the region. “Come here to invest in BP, for example,” he said.

Benefits of DRs

Chairman of the Securities and Exchange Commission, Osbourne Nurse, said depository receipts (DRs) would be a convenience for investors.

Local investors would be able to buy DRs without having to go through the hassle of contacting a broker in the New York to buy the actual stock which would trade on a foreign stock market.

Nurse said DRs would give the ordinary investor a chance to get a share of a foreign company.

SEC official Brendan Trim said DRs would look and feel just like a local security and have all the characteristics of a local security. It will be traded on the local stock market and be denominated in TT dollars and investors who want to buy them will simply have to go to a local stockbroker or agent, just as they do at present.

He said investors would also have the option to convert them to the underlying security.

He cited some of the other benefits of the DRs as:

- Leading to increased trading activity on the local stock market
- DRs will absorb some of the liquidity in the economy, thereby reducing inflationary pressures.
- Encourage greater diversification by local investors
- Contribute to deepening of capital market and development of T&T as an International Financial Centre. Will encourage regional investors to come to T&T market to get into DRs.
- Eliminate the need for currency conversion.
- Generate fees and income for local financial market participants.
- Investors will get a fraction or interest in a US/Canadian/or UK stock at an affordable price.


Source:
Verne Burnett
verne.burnett@guardian.co.tt
Trinidad Guardian
Thursday May 1, 2008

http://www.guardian.co.tt/bussguardian7.html