Kerwin Hamil | Implications for business after the IPO

The current stock market boom has motivated several local firms to obtain financing through initial public offerings, IPOs, most of which were oversubscribed and created history within the local capital market.

Some of the largest offers included Wisynco Group Limited in December 2017 – $6.10 billion; Wigton Windfarm Limited in April 2019 – $5.50 billion; and Sagicor Select Funds Limited in July 2019 – $4 billion.

However, despite these events and the success of the offers, many Jamaicans do not know the significance of an IPO.

An IPO is a method of equity financing which depicts the very first time a privately owned company will offer shares to the external public. Subsequent to the IPO, the total number of shares issued by a company will be owned by external and internal shareholders, rather than solely the initial founders or close family members or friends within the company. The IPO is an integral step to get listed on the Jamaican Stock Exchange (JSE).

Listing on the local stock exchange gives the firm the capability to obtain equity financing from diverse groups of shareholders. When entities become listed, their financial affairs are made available to the entire public, thereby giving potential investors the ability to make rational decisions as to whether or not they should invest in the stock.

Pluses to listing

Potentially, firms that list on a stock exchange are able to obtain more capital at a cheaper cost than their private counterparts.

Listing on a stock exchange provides greater liquidity. That said, it is also easier to trade the same stocks in the secondary market by the firm’s investors due to the reduced risk on these stocks.

The stock exchange, which is an avenue for ascertaining a fair price, provides an easier route to investors trading in stocks than if they were not listed. Even though the proceeds of share sales in the secondary market are not attributable to the firm, but the individual investors, frequent trades produce a basis for ascertaining a fair price of an entity’s stock.

Getting listed on the JSE Junior Stock Exchange has additional benefits for firms, including income tax concessions for a maximum of 10 years. The concession entails an initial five years in which companies listed on the said exchange benefit from 100 per cent corporate tax relief, while for the remaining five years, companies receives a 50 per cent waiver from corporate taxes.

The benefits are geared towards the provision of additional working capital during the embryonic stages of small firms. Where used appropriately, they are also intended to assist with expansion of start-up firms, providing additional employment as well as increasing the country’s gross domestic product by way of additional collection of general consumption taxes, as well as stimulating economic growth for the Jamaican economy.

Drawbacks to going public

Going public disperses the number of shares that are outstanding by a firm. The dispersion could potentially affect the control of existing shareholders, especially when the aforementioned investors only maintain de facto control – that is, having control but owning less that 50 per cent of the ordinary share capital. Less than 50 per cent ownership increases the risk of hostile takeovers.

Going public also exposes the firm to increased scrutiny which invariably comes at an expense to the company. Subsequent to getting listed on the stock exchange, there are guidelines associated with the maintenance of the listing. A typical example is the annual, as well as quarterly reporting of financial statements, which can be very costly.

Finally, the cost of equity, with the exception of those incurred on certain preference shares, is not a deductible expense for income tax purposes. Section 13 of the Jamaican Income Tax Act outlines that entities are allowed expenses which are deemed “wholly and exclusively” incurred in arriving at the income. However, the said expenditure must not be capital related nor should it be of a private nature. The dividend paid on equity instruments are distributions, hence, they are not allowable deductions in arriving at taxable income.

Notwithstanding the disadvantages of issuing IPOs, there are huge benefits involved where utilised in a timely manner as well as for the appropriate purposes.

When deciding to go public, it is advised that firms pay attention to investor confidence, the industry, risk profile as well as the current state of the economy.

Kerwin Hamil is the finance, accounting and taxation professional, programme director, School of Business Administration, University of Technology Jamaica-Western Campus. kerwin.hamil@utech.edu.jm.