The junior market: Not a win-win for all investors

BY Lloyd Vermont, Guest columnist

It is interesting to see that our Trinidadian friends will be coming to look at our junior market with a view to implement their own version.

One of our big challenges as Jamaicans is that we do not innovate enough. Emphasis is on enough. Happily, we have had some outstanding innovators who have made us proud.

Think of Dr Evans and Tia Maria coffee liqueur. Think of Prof T.P. Lecky and the Jamaica Hope and the other cattle breeds he developed for tropical climates. And think of our ortanique. So, we do have innovators who have brought us this far.

The challenge, as Jamaica embarks on the next 50 years of Independence, is for our education system at its various levels, including university, to instil and nurture the mindset for research and development, such that Jamaica can become the 'Israel of the West' and carve a development trajectory which can take us out of the economic stalemate and poverty to which the policy mistakes — and corruption — of our first 50 years in independence have consigned us.

In the footsteps of Dr Evans, Prof Lecky and a few others not mentioned, the leadership of the Jamaica Stock Exchange must be commended for introducing the junior market. This, too, is innovation.

As a October 21 Financial Gleaner story has reported, it has brought many entrepreneurs to the forefront, transformed their businesses into near household recognition and pumped more than J$21 billion of equity into the economy. This is not peanuts!

In our context, this is big money which will get bigger as more of the estimated 30 potential businesses — JSE's estimate — come to the market.

But, I have a bone of contention with the present 80:20 ownership structure of the market and how this, in my opinion, distorts what was intended to be a benefit for all shareholders in junior market enterprises.

A MORE EQUITABLE SPLIT

Those who question the quantum of tax relief have a major point. Even with good things, one can sometimes go overboard.

Even so, my concern is elsewhere. It is that where such massive tax benefits are given, it should go to more investors other than the persons who bring a project to the market. Unless I have a fundamental misunderstanding, it seems to me that the regulation says that 20 per cent of the shareholding of an enterprise must go to what we could call 'outsiders'.

This means that 80 per cent of ownership must remain with the originators. Following on the same line, this must mean that 80 per cent of the tax benefit foregone must go to those with 80 per cent of the enterprise with only the other 20 per cent going to outside investors.

What would be a more equitable shareholder split? Assuming that this analysis is correct, it would seem that the outside investors - those with the 20 per cent of ownership - come nowhere near getting the benefit of the tax break that goes to those with the 80 per cent ownership.

Granted, those who conceptualise and bring an idea to fruition and market are deserving of a premium for their initiative and effort. And, the junior market correctly sets out, and has succeeded beyond measure, to recognise this with the initial five years of no tax and subsequent five years of only 50 per cent. This is the crux of the matter.

Depending on the size of sales, the tax foregone over these ten years constitute an important benefit, and it is this benefit that I believe should be more equitably spread among shareholders of these junior listings.

Instead of an 80:20 split, a more equitable one would be in the region of 60:40 so that 60 per cent of the benefits go to the people who bring a company to the market with the other 40 per cent going to other Jamaicans who invest in its shares.

WOULD THEY REFUSE TO 'BUY IN'?

Question: With a 60:40 ownership split instead of the present 80:20, would entrepreneurs refuse to buy into the junior market initiative? I do not think so, because the benefits to them would still be too substantial for them to ignore.

Apart from getting 60 per cent of the 10-year tax break, another very considerable benefit of the Initiative is that it enables the monetisation of these companies and makes it that much easier for their owners to benefit by selling their shares post coming to market or, where loan funding is still needed, for them and lenders to know the market value of their enterprise.

The 80:20 ownership mix should be revisited and changed to give more of the benefits to outside investors.

All of this, however, does not take anything away from the overall benefit of the junior market.

It is a welcome initiative that, in these post JDX days, is finding a home for many millions of investment dollars. These investments will only grow bigger and, over time, help to broaden, and strengthen, our equity market.

All commendation is in order. It seems to me, though, that this broadening and strengthening could benefit more individual investors if significantly more than just 20 per cent of ownership - which translates to 20 per cent of benefits - was made available to outside investors.

Lloyd A. Vermont Sr is a financial empowerment strategist and life coach.tryltd@cwjamaica.com