BY JULIAN RICHARDSON Assistant Business Co-ordinator firstname.lastname@example.org
THERE is growing discontent among Jamaica Stock Exchange (JSE) Junior Market stakeholders over perceived plans to remove incentives believed to have fuelled the market's rapid growth and general economic development over the last four years.
It stems from the anticipated Omnibus Tax Incentive Act and alleged recommendations by a task force commissioned to help shape the legislation. It is unclear what exactly the so-called Incentive Working Group (IWG) has proposed, but talk has intensified recently that the market's present 10-year tax benefit structure — five years free of corporate income tax followed by five years of half tax — for listed companies is in danger. The IWG's proposal is reportedly centred on a recommendation for a lower corporate income tax rate for all companies in Jamaica.
"We understand that there has been some amount of lobbying with the aim of bringing an end to the Junior Market," Lascelles Chin, the chairman of the Lasco Group of Companies which listed on the Junior Market in 2010, said in a letter to the media last week.
"For Jamaica's sake and in order to assist in providing well-needed employment in the country, we hope that this will not have the approval of the Government of Jamaica," Chin said.
The Junior Market was implemented in 2009, with the tax breaks acting as a major incentive for companies to go public. Since its inception, the market has listed 19 companies, the most new issues over a four-year period in nearly 30 years. Of the 16 companies that have been listed for at least six months, 12 have seen an increase in their share price, four of them by more than three times, up to yesterday's close of trading.
Lasco raised $415 million for its three companies — Lasco Manufacturing, Lasco Distributors and Lasco Financial Services — through the Junior Market. Chin noted that if it was not for the listing, the company would not have been able to embark on a major expansion project, including a $2.1-billion manufacturing plant in St Catherine, expected to employ hundreds of Jamaicans and boost
exports that will earn the country much-needed foreign exchange.
John Mahfood, CEO of Jamaican Teas Group, told the Business Observer on Monday that he heard that the task force has recommended to the finance minister that the Junior Market incentives should be removed.
"From my standpoint it is really totally crazy, I mean it in the strongest way, that they would want to kill something that for the first time is actually helping to
build the private sector," Mahfood argued.
Jamaican Teas Group listed on the market in 2010. The firm has a diverse operation that includes Jamaican Teas Limited, with its Tetley and Caribbean Dreams products; H Mahfood and Sons Limited, which owns a number of properties; and JRG Shoppers Delite Limited, which operates a supermarket in Kingston and another in western Jamaica.
Had the company not raised capital by way of the Junior Market, it wouldn't have been able to turn a supermarket around and hire over 100 persons, Mahfood said.
"Very few companies are willing to grow based on bank borrowing — interest rates are still high and the banks are still very difficult," he noted, adding "So there was an opportunity created by the stock exchange to get equity capital and I think that there has been actual proof to show that this has worked."
Gary Peart, CEO of Mayberry Investments Limited, which has acted as lead broker for 12 of the companies that have so far listed on the Junior Market, believes none of the market's current members would have made the move to go public without the incentives. Among the confluence of reasons why the market structure should remain untouched is the fact that the incentives were actually put in place by a working group that comprised representatives of the Ministry of Finance, the tax authorities and the JSE, he said.
"Coming out of that group, they took into account all the failings and weaknesses of all the previous incentives and came out with a conclusion that it is the most democratic incentives that is on the book," Peart said.
"With the Junior Market, it's not industry specific, any company in Jamaica can qualify; it's transparent, has the corporate governance principles in place et al," Peart noted.
Against the background of a cash-strapped Jamaican government, the Omnibus Tax Incentive bill is a key element in fulfilling the International Monetary Fund (IMF) agreement. The bill aims to establish a transparent and coherent regime to govern all tax incentives, and will also eliminate ministerial discretionary powers to grant tax relief.
Chin stated that he hopes, along with the conditions stipulated by the IMF, that "there is leeway" for schemes like the Junior Market to
"As in all countries that succeed in manufacturing, they receive a significant amount of assistance and incentives," Chin said.
Peart thinks there is in fact leeway.
"The reality is that the IMF gives broad parameters to move towards a better economy. It doesn't mean, strictly speaking, that you have to eliminate everything," Peart said.
Supporters of the Junior Market have often noted that, because the tax saved by listed companies is ploughed back into the businesses, the Government recoups its money through increased GCT in the short term and higher corporate tax revenues in the long run.
JSE statistics highlight that the overwhelming majority of companies listed on the Junior Market are performing much better financially than before they listed, even when the tax benefit is excluded. All but three companies recorded a positive change in pre-tax profits — ranging from eight per cent to 2,679 per cent — at the end of the 2012 financial year compared to pre-listing, while only one company recorded revenue decline, JSE figures indicate.
"This suggests that the money raised has been put to good use and has impacted their bottom lines positively," according to NCB Capital Market's assistant vice-president of corporate solutions, Dylan Coke.
"The JSE has collected lots of evidence to show that the funds raised on the Junior Market have been employed to either retool, expand locally and regionally, pay down high cost debt and create hundreds of jobs. This is precisely what junior markets are intended to do — help promote growth," added Coke, who was a member of the JSE Committee that set up the Junior Market.
NCB Capital Markets recently announced its intention to make up to $1 billion in private equity investments across the region, with the stock exchange providing an exit opportunity through listing.
It is being argued that gutting the Junior Market could turn off venture capitalists.
"This one initiative (the Junior Market) may well be the cornerstone of a vibrant future private equity and venture capital market in Jamaica," Coke said.
Added Peart: "That's a point for them to leave it alone. Most of the companies who start up will fall in the junior market category and every venture capitalist wants an exit."
What has been especially displeasing for Mahfood is the fact, he said, that there has been no consultation with stakeholders of the JSE and Junior Market over the proposals.
"Nobody to my knowledge talked to anyone on the exchange. It is so ridiculous that they would do this and contemplate doing this and not even talk to the companies," said Mahfood, adding that "jealousy" may be fuelling some of the flames against the market.
"There is an element of jealousy in it too. I don't know who this working group comprises, but a lot of people may say 'why should some group be getting tax benefits that I'm not getting'," he said.
JSE general manager Marlene Street Forrest later supported Mahfood's argument that there was no consultation with JSE executives, member companies, or investors.
"We had no input into the deliberations. Our opinion was not sought on how the recommendations would impact the market nor were we provided with any information on the recommendations," Street Forrest told the Business Observer.
"Very indirectly, we got wind of what would have been recommended and decided that it was important to act on the information we received by first reaching out to the minister of finance," she added.
Subsequently, Street Forrest said a meeting was organised with the IWG, to whom JSE stakeholders provided with empirical data on the success of the market, the imperative for growth and of maintaining the non-sectoral incentive.
"We are of the view that our representation was too late as the IWG had already formed their position and while they heard us were not willing to entertain a change," she said.
Since then, the JSE has had meetings with other stakeholders, including multi-lateras agencies such as the IMF, World Bank and the IDB, Street Forrest said.
The general manager said the JSE will next meet with the PSOJ to discuss the developments and wishes to have further dialogue with the IWG.