Credit union hits roadblock on JSE listing - Regulator questions whether deferred shares listing breaches cooperative rules
In what would be a first for a Jamaican credit union, shares issued to its members valuing $900 million are now targeted for listing on the Jamaica Stock Exchange, which could open up the possibility of non-members gaining ownership through regular trading.
That possibility has led to questions from regulators, who see it as going outside the boundaries of the cooperative structure, which is membership-based.
The planned listing of the deferred shares of Community & Workers of Jamaica Co-operative Credit Union Limited, C&WJCCU, is to be done “by introduction” around mid- or late summer.
C&WJCCU opted not to comment on the number of shares and the listing price, saying some aspects of the transaction were the subject of legal and regulatory review.
The securities for listing were taken up by members and other cooperatives in June 2018.
The Department of Cooperatives and Friendly Societies and the Bank of Jamaica (BOJ), which is in the process of taking over the oversight function for credit unions, separately raised concerns about who can own the shares and how the institution will account for the shares on its books once they are listed.
“The Department of Cooperative Societies, who I think, in theory, is in support, had some issues with how the regulation was worded because it says ‘deferred share’, and, in theory, all shares have to be owned by members,” said C&WJCCU Chief Executive Officer Carlton Barclay.
“They suggested that the deferred shares [must] be owned by members but we can’t force you to be a member to buy the share on the JSE. The JSE is free, anybody can buy or sell stocks, so we couldn’t put that restriction on the deferred share,” he said.
The BOJ, he added, may request that the company no longer account for the $900 million raised as capital after the listing.
Deferred shares are instruments issued by a credit union at no par value and held by a member for a period of not fewer than five years. The shares form part of the capital of the credit union and are treated the same as preference shares in corporate entities, with no voting rights.
Barclay told the Financial Gleaner that C&WJCCU has already revised its internal rules to recognise the deferred share as a debt instrument, thereby negating the requirement that a deferred shareholder automatically be recognised as a member of the credit union.
The CEO is hoping to have the matter on how it accounts for the shares listing sorted out with BOJ in time for the shares to start trading by August.
It requires the intervention of the minister in charge of cooperatives, Industry Ministry Audley Shaw, who Barclay says has already held consultations with BOJ and the Department of Cooperatives.
“You don’t need a change in the act, just a regulation to say exactly what I’ve just said … . So that’s all that we [are] waiting on the minister to do,” he said. “We have no objection to the BOJ saying deferred shares won’t be [counted as] capital,” he said.
Under a listing by introduction, a company applies to the stock exchange to list shares without making an offer to the market through an initial public offering of those shares.
C&WJCCU wants to increase the liquidity of the shares via the stock market listing and give holders an opportunity to exit the investment before the maturity date.
“The major deficiency of the deferred-share issue is that it is a debt instrument, meaning when you give us your money, you can’t get it back until five years. But what if something happens during that period and you want back your money?” asked Barclay.
“How we fix that problem is by listing it. All you would do is carry your certificate to a broker and get your money. The credit union’s capital is not affected because it will be sold from one person to another,” he said.
Last June, the JSE amended its rules to allow member-based organisations, which were considered ‘approved entities’ but not necessarily designated as ‘regulated’ entities under the Companies Act, to list their shares on the exchange. They included cooperatives and building societies.
JSE Managing Director Marlene Street Forrest told the Financial Gleaner that the adjustment was done to open up the stock market to registered institutions for fundraising and to give stock-market investors more opportunities for trading.
“We are therefore very excited about the prospect of listing the deferred shares of the Community & Workers of Jamaica Credit Union later this year,” Street Forrest said on Tuesday.
“I believe it will signal to other credit unions how they can invite others to participate and provide capital. By extension, it could possibly lead to an increase in the membership of credit unions across Jamaica. Overall, this is a good way to ensure that capital is used productively. I wish to applaud them in moving in this direction,” she said.
C&WJCCU’s deferred shares offer investors a return of 7.35 per cent fixed for 24 months on five-year and 10-year instruments. Interest for the five-year instrument becomes variable after year two at a reset rate of two per cent plus the six-month Treasury bill yield, while the 10-year instrument offers a reset of 2.5 per cent, plus the six-month treasury rate after the end of the second year up to maturity.
The interest on both instruments is reset annually.
When the credit union went to market last year, Barclay said the proceeds of the offer would be used to pay back maturing deferred shares; to upgrade banking software to allow for Internet banking; to offer new services, including partnering with Alliance Investment on card services; and for working capital financing. MoneyMasters Limited acted as the broker.
Since then, C&WJCCU has invested US$1.5 million in upgrading the credit union’s information technology system.