To conduct research, disseminate relevant information and maintain local and
international relationships calculated to enhance the development of the stock market.
Regulatory Functions
As we have seen in Guyana a country can in fact operate without a stock exchange relying on the Companies Act, the Ministry of Finance and / or the Central Bank to carry out the regulatory functions associated with the Stock Exchange. What distinguishes a Stock Exchange from these is the strong, independent regulatory role which the Exchange exercises over the players involved leading 'to greater efficiency in the establishment of the prices at which securities are traded and the transparency of transactions.
Ideal Setting
The Exchange provides the ideal setting for companies or the government to raise funds in an initial offering (IPO), or as a secondary market whereby the holders of securities can sell them at any time. Public offerings are always a matter of intense interest to the financial media and companies are always keen to ensure that they project the best possible image to the public. Failure of any offer of its shares to the public is a major setback to any business and has serious implications for its access to funds and the price it has to pay for those funds. Companies that are star performers find it easy to access funds. Their shares are popular with the investing public and there are often substantial gains to be made from them over a relatively short period.
Cost Factors
The recent debate has been largely driven by the effects of the of high cost of commercial credit which eats away at the profitability of companies and strangle their growth. Bank interest generally accrues on a daily basis and is a charge against profits. By law, the returns to equity investors in the form of dividends can only be paid out of profits. However, the company is not required to make good either realised or unrealised capital losses or to eliminate past revenue losses before paying a dividend. In practice company directors are generally very cautious and take a much more prudent approach to the payment of dividends.
Policies
Dividend policies are generally framed with re-investment as a major consideration and since re-invested funds are reflected in the share price, investors are generally willing to accept low payout ratios. The overall cost of equity is therefore much lower than borrowings although it would be a mistake to suggest that equity is free. Many companies also count the cost of the statutory obligations, the reporting requirements and the pressure of expectations of its shareholders as having a significant impact on the way the company is run.
Business Culture
The company must earn a minimum return in order to maintain its share price and to provide an adequate return to shareholders. In real dollars the audited accounts should also reflect the true profitability and consequently the associated taxes payable which is often not the case in the controlled environment. There is, also an opportunity cost to the shareholder and when share prices decline he may incur substantial capital losses.
The question may well be asked why equity financing is not more often used since there are such strong theoretical as well as practical reasons for it. Recent changes in our tax laws are extremely favourable to equity particularly in public companies. The answer to the question posed lies in our business culture including the poorly developed financial products and instruments available to the investor.
Financing Strategy
Circumstances and the Financial Institutions Act are already having a profound effect on this culture. We are likely to see banks increasingly reluctant to finance certain projects and to look far more closely at debt: equity ratios i.e. the relationship between the funds they provide as compared with the funds provided by the investor.
The other essential reason for long term borrowing or equity is that there is a better matching of the source of the funds with their application. In other words short-term borrowing should finance short-term investment while long-term borrowing and equity should finance long term investment.
Difficulties
With only moderate resources the entrepreneur will find that his business will grow only at a very slow rate if at all or that he will have to bring other equity investors into his business. And herein lies the crux of the problem: the solo entrepreneur is obsessed with control and resists opening his books to anyone else. There are as well some very practical difficulties:
The risk of takeover although this could be minimised by offering less than a controlling interest to the public.
Having to share one's success- but sharing a larger business is better than having all of a smaller one.
Sharing of information and regular reporting and communication can be very costly.
There is a substantial initial cost in underwriting fees, legal and accounting fees and filing fees.
The process of taking a company public is very time consuming and uses considerable management resources.
There is the possibility of loss of management control.
Shareholders expect continuous growth.
The company may lose tax "minimisation" opportunities.
Conclusion
These costs cannot be ignored but they must be set off against the advantages of going public. The advantages include access to a large pool of funds, greater marketability of the securities, increased personal shareholder wealth, enhanced corporate image and visibility, better governance, better controls and financial discipline and the focus on growth strategies and profit maximisation for enhancing shareholder value rather than tax minimisation.
It is believed that a stock exchange will help to promote and encourage companies to go public by introducing another element of competition in how companies access funds. The major encouragement by governments so far has been in the favourable changes to the tax regime. It needs to take this a step further- it should facilitate the setting up of a stock exchange and give momentum to it by offering its own securities thereon and late though it is, effect the remaining privatisations through the exchange.
A well functioning stock exchange has a number of benefits to the country:
A properly regulated market with an adequate number of participants who trade and deal is critical to economic growth.
- it promotes savings and ensures that capital accumulation is channeled into the most productive areas of economic activity
An efficient capital market ensures that all of society can share in the country's economic prosperity.
Opportunities for cross-listing on other exchanges
- Local companies becoming more competitive and better able to attract international interest.
There appears one additional compelling reason for the Government to act with some haste: if it does not facilitate the opportunities for raising and investing funds locally both savers and borrowers will go outside resulting in further loss of control over the economy and a new form of colonization.
