Bruce Golding: Don’t scrap junior stock market
The junior stock market was established in 2009 to encourage and facilitate the development and growth of smaller companies, especially new enterprises, by enabling them to raise equity that would not otherwise be easily available to them and to do so within a regulated framework that would engender confidence among potential investors.
There are many small businesses that have good growth potential and many young entrepreneurs with innovative ideas, but they do not have the capital to move forward. The requirements for listing on the main exchange are too onerous for many of them, especially those with little or no track record, notwithstanding the soundness of their business plans. The competition they have to face from established listed companies with extended stock-performance history places them at a severe disadvantage.
Bank loans are not the answer. Collateral requirements are most times prohibitive. A debt-finance burden and loan transaction fees may turn the possibility of success into the likelihood of failure. Furthermore, commercial banks, given the bank failures in the 1990s meltdown and the excessive regulatory requirements that were subsequently instituted, are risk-averse and risk-discouraged and find safety in government paper, trusted and tried good customers, and heavily collateralised borrowers. As a result, many creative ideas that may well include real game-changers for the national economy are left to wither on the vine.
The Junior Market offered a real, live alternative. Special arrangements had to be made to make it effective. A separate platform within the Jamaica Stock Exchange was established. The requirements for listing were made less rigorous, especially with regard to the required number of shareholders and the fees that would apply. However, care was taken to protect the potential investor from blind risk and undue hazard:
- The company must publish a prospectus and raise a minimum of $50 million through an IPO.
- There must be at least 25 shareholders in the first five years and 50 in the second five years holding not less than 20 per cent of the issued shares.
- The company must appoint a mentor approved by the Jamaica Stock Exchange to monitor and provide guidance for the operation of the company.
- The company must submit for publication its quarterly financial reports and yearly audited accounts and promptly inform the exchange of any significant change in the company or its operations.
Although less onerous than those that obtain on the main exchange, the rules for companies listed on the Junior Market are still comprehensive, covering more than 100 pages. Listing increases the visibility and recognition that a company enjoys, and the framework of rules to which they must conform enhances their credibility and the confidence of the investing public.
Tax incentives were provided to help these fledgling companies establish themselves and achieve growth as well as to enhance investor confidence in the returns that could reasonably be expected. Full relief from income tax was granted for the first five years and 50 per cent for the second five years, plus exemption from tax on dividends and stamp duty on the transfer of shares.
Measures were put in place to preserve the essential purpose of the Junior Market as a threshold for the takeoff of small companies and start-ups. A company whose share capital reached more than $500 million would be required to transition to the main exchange and would no longer enjoy the special benefits. If it decided to delist from the exchange within 15 years, it would be required to repay all the tax benefits it enjoyed as a Junior Market-listed company.
When the Junior Market was introduced in 2009, it was new to Jamaica, but it wasn't a new concept. A similar facility, the Alternative Investment Market (AIM), was established within the London Stock Exchange in 1995. It has attracted 3,500 companies that have been able to raise more than PS90 billion in equity. Other countries followed suit: Canada's Venture Exchange (1999), Barbados' Junior Market (1999), Ireland's Enterprise Securities Market (2005) and, most recently, Trinidad and Tobago's Small and Medium Enterprise Market (2012).
The success of these special markets varies from country to country and is affected by a host of factors peculiar to each and to the stock market in general, but the performance has been good for most and spectacular for some, and they have played a significant role in creating jobs and stimulating economic growth.
It is, in my view, a retrograde step that the Government has taken to phase out the Junior Market commencing on April 1, 2016, a decision that was reaffirmed by the financial secretary just over a week ago, despite the strong appeals for reconsideration from several quarters. As of that date, Junior Market benefits will not be available to any new company and those listed since January 2014 will benefit from tax relief for the first five years only. When the period of tax relief expires for those already listed, the Jamaica Junior Market will effectively disappear.
The decision was first announced by the finance minister in October 2013. The rationale offered was that with the reduction of corporate income tax and the rationalisation of fiscal incentives, the justification for the special Junior Market regime no longer existed.
The Government would be well advised, even at this eleventh hour, to revisit this decision. The need to create a special pathway for small companies and start-ups ought to be part of any serious growth agenda. The five-per cent differential in the treatment of large and other unregulated companies in the new corporate tax structure is not sufficient to address the peculiar difficulties faced by small businesses and start-ups. Contrary to the oft-heard mantra, economic stimulation does not come just from levelling the playing field.
Large parts of a jungle are dead flat, but yet only the strong survive there. Ironically, those countries that prescribe the level playing field for us don't apply it to themselves. Almost every developed country provides special incentives for small businesses and start-ups and those incentives are being expanded, even now as it is shown that innovation and technology are critical tools for driving economic growth.
The Jamaica Junior Market has produced strong, positive results. Twenty-five companies have so far been listed - more than half the number on the main exchange - and they have raised almost $4 billion in equity.
The Junior Market index grew by 154% in its first full year and 114% in the second. An article by The Gleaner's business journalist, Steven Jackson, published on January 6, 2012, reported that in 2011, the Jamaica Junior Market recorded the highest index gain of all exchanges in the world. It has grown by more than 1,350% in the six years since its inception and, as of the close of trading last Wednesday, it had gained 32% since the start of 2016. One company, Jamaica Teas, reported a few days ago that it had doubled its exports since listing in 2010.
It is a rather strange paradox that on January 22 last year, even long after the Government's decision had been announced, the finance minister signed an agreement with the IDB's Multilateral Investment Fund for a grant of US$563,750 for a project titled 'Promoting Access to Equity Financing to SMEs through the Jamaica Stock Exchange's Junior Market'.
ADOPT THAT MINDSET
This project is intended to provide SMEs with technical support, training and capacity building to enable more of them to meet the requirements for listing on the Junior Market. Speaking at the signing ceremony, the IDB country representative noted the impressive performance of Jamaica's Junior Market and the need to enable more companies to join.
Indeed, the project's stated targets include increasing the number of listed companies to 47 within two years, special training for mentors, attorneys and brokers, and the setting up of a Pre-Listing Technical Assistance Unit. I have great difficulty in reconciling this initiative with the previously announced and recently reaffirmed decision to close out the Junior Market.
The Government is being short-sighted. The tax revenue it forgoes from these small companies now is chicken feed compared to the revenues it would derive in the future if these companies are birthed and allowed to grow to the point where their taxable profits are robust. An investor buys stock not so much for the dividends, which are usually modest, but for the capital gain further down the road. The Government should adopt that mindset.
I have heard anecdotal suggestions that the Government's concern is that the Junior Market's provisions are being abused. If that is the problem, let's fix it, but don't scrap it.
- Bruce Golding is a former prime minister of Jamaica. Email feedback to firstname.lastname@example.org.