Feb 2007 Financial News

Regional stock exchange needs further examination - Wehby

Feb 09, 2007

The call for a regionally integrated stock exchange has gained momentum. However, the Deputy CEO of GraceKennedy, Don Wehby is calling for greater analysis of the pros and cons to be made before drawing conclusions about the efficacy, or lack thereof, of such an exchange.

The proposal to integrate the Caribbean's stock markets met a favourable response at last month's second annual Jamaica Stock Exchange (JSE) Investments and Capital Markets Conference held in Montego Bay. An alliance of the JSE, Barbados Stock Exchange (BSE) and the Trinidad &Tobago Stock Exchange (TTSE) - called the Caribbean Exchange Network -is being championed by the General Manager of the JSE, Marlene Street-Forrest. This new body, she maintains, will enhance the efficiency of trading stocks regionally.

"Through this vehicle - the Caribbean Exchange Network - we will be trading securities of all markets, therefore a personal investor in Jamaica who wants to buy a security on the TTSE can do so through a broker in Jamaica. It's a seamless operation.

There are some benefits that we see to this regional alliance (if approved): The benefit of persons having access now to over a hundred companies, they will not have to possibly ask a broker in another country to do a transaction for them and there will be a greater mix to the investment portfolio," said Street-Forrest.

Currently the JSE lists 42 companies, the TTSE 36 and the BSE 24 - a total of 102.

Wehby is of the view that a regionally integrated stock exchange would simply allow for multiple products to be traded on a single platform.

"As Marlene Street-Forrest pointed out in her presentation at this year's JSE Investments & Capital Markets Conference, there would be an increase in the liquidity in the market and the endless possibilities of new products, integration and cross fertilisation of knowledge that are accessible through a common market".

The way Wehby sees it, if investors have the opportunity to trade in all three markets there would be a greater opportunity for wealth creation as there could be a greater diversification of portfolio assets. He points to companies like JMMB, FirstCaribbean and RBTT who are cross-listed on all three exchanges.

"So persons in each of the three territories are able to buy and sell stocks in these companies. However, the process of buying stocks in companies that are not cross-listed is a lot more complex than it would be if there were a regionally integrated stock exchange," added the Grace deputy CEO.

Wider market for raising capital

He sees a single Caribbean exchange offering a number of benefits, notably an increase in the possibility of local companies and individuals having access to a wider market for raising capital. This, he believes, could help with small business growth in all three economies.

"Another benefit is that it would encourage investors to diversify their portfolio regionally, thereby contributing to the growth of the region's businesses and by extension, helping the region to really become globally competitive.

"In the very near future, there will be an Eastern Caribbean (EC) Stock Exchange and were they to become a member of the regionally integrated stock exchange, there would be a significant widening of the variety of securities available for investment."

Reporting deadlines
The harmonisation of the regional stock exchanges is made difficult, however, by the fact that there are different regulations governing each of the exchanges. One such major difference lies in the reporting deadlines of each of the three.

While Jamaica and Barbados both report quarterly and annually, Trinidad & Tobago only reports semi-annually and annually. For Jamaica, the deadlines are quarterly - within 45 days of the end of the quarter, and annually - within 90 days of the end of the financial year.

"There is a choice, however in that we can opt not to report on the fourth quarter and just report annually, but with a reporting deadline of within 60 days of the end of the financial year. For Trinidad, the deadlines are semi-annually - within 30 days of the end of the half-year- and annually, within 120 days of the end of the financial year.

"For Barbados, the deadlines are quarterly - within 60 days of the end of the quarter - and annually - within 90 days of the end of the financial year. In order for us to move forward with regional integration, we would need to declare common reporting deadlines as just one measure of harmony," surmised The GraceKennedy senior executive.

Taxes on dividends
Another major difference among regional exchanges pertains to the payment of taxes on profits being allocated as dividends.

This has not escaped Wehby's attention. "If a parent company is listed on the JSE, and it has a subsidiary listed, the profits of the subsidiary are taxed before being sent to the parent company as dividend payouts.

"Subsequently, the money received for dividend payouts is taxed for income, thereby resulting in the money being what we refer to as 'double-taxed'. In Trinidad, dividends paid by the subsidiary are not taxed as they are paid out of net profits; however, dividends received by the parent company are taxed as income received. Here, we see that unlike in Jamaica, it is only taxed once, at the parent level."

Takeover codes
Another illustration of the standardisation that would be necessary before the implementation of a regionally integrated stock exchange can be found in the takeover rules of the different exchanges.

For example, in Jamaica if a listed company is desirous of buying out the major stock in another listed company, the minimum threshold before the new majority shareholders have to make a mandatory offer to the minority shareholders is 50 per cent. In Trinidad, it is 30 per cent, and in Barbados it is 25 per cent.

"Despite these challenges, it is beneficial for us to push forward with the plan for integration, as the benefits to the regional economy cannot be ignored. The proposal of a Caribbean Exchange Network (CXN) outlining the processes involved in creating such an exchange has been introduced.
The proposal describes the need for instruments such as a Regional Inter Central Securities Depository (CSD) Agreement, CXN Member Rules and an application for trading membership in the CXN," said Wehby.

On the banking side, he is of the view that a regional stock exchange would require the creation of a settlement bank, specifically designed to handle the clearance and settlement of securities. This would significantly decrease the complexity of trading in regional securities, as it would allow persons to trade directly with a broker assigned to such trading.

"This would also mean, however that there would be the need for both a common settlement agreement and a common settlement cycle in order for such a bank to work effectively," added Wehby.

Al Edwards
The Jamaica Observer
Friday, February 09, 2007
http://www.jamaicaobserver.com/magazines/Business/html/20070208T220000-0500_118915_OBS_REGIONAL_STOCK_EXCHANGE_NEEDS_FURTHER_EXAMINATION___WEHBY.asp