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Considering the Phoenix Park IPO
The unofficial, but highly credible word on the eagerly awaited Phoenix Park Gas Processors Initial Public Offering is that it has been pushed back until October. Part of the reason was revealed by Finance Minister Larry Howai on Tuesday night in response to a question on the matter after a function at the Hyatt Regency hotel, Port-of-Spain.
Minister Howai suggested—in a Q&A interview published in the BG View space on Thursday—that one of the issues that may be holding up the offering is an exchange of ideas within Cabinet on the issue of whether the purchase of shares should be capped (meaning the introduction of an upper limit on the number of shares that individuals could buy).
Minister Howai suggested that one of the arguments that had been made in Cabinet was that if a cap was imposed, all of the shares that the National Gas Company is looking to sell in Phoenix Park may not be fully subscribed.
Others said it was very unlikely that the IPO would be under-subscribed because, one imagines, of the high level of savings in deposit accounts and income funds, the pent-up demand for high-quality, dividend-paying equities and the success of the First Citizens IPO in building the wealth of those who invested in the bank. “We are trying to figure out how we deal with these issues so that we do not have a repetition of what occurred with the First Citizens IPO.
“It’s amazing that we used the same model with the First Citizens IPO that we used with the NEL IPO more than a decade ago and NEL went perfectly as there weren’t any issues,” said the minister. If the Ministry of Finance wants a new model for the allocation of shares in an IPO, they would be well advised to take a close look at the Royal Mail IPO which was offered in the UK in October 2013, just weeks after the listing of First Citizens.
Here’s what the Royal Mail prospectus said: “If the demand for Ordinary Shares exceeds the number of Ordinary Shares made available in the Offer, allocations may be scaled down at the discretion of the Secretary of State and applicants may be allocated Ordinary Shares having an aggregate value (based on the Offer Price) which is less than the sum applied for. The Secretary of State may allocate such Ordinary Shares at its discretion. In such an event, there is no obligation for the Secretary of State to allocate such shares proportionately.”
In effect, what the British government did was allocate all individuals applying for up to £10,000 (about $110,000), exactly 227 Royal Mail shares. All of those individuals who applied for more than £10,000 worth of Royal Mail shares did not receive any shares at all.
Here is how the pricing statement for the Royal Mail IPO put it: “All members of the public who have applied for shares in Royal Mail through the Retail Offer, up to and including applications of £10,000, will receive an allocation of 227 Shares which is equivalent to £749.10 at the Offer Price.
“This represents almost 95 per cent of all members of the public who have applied; or over 690,000 people. Those who have applied for shares worth more than £10,000 will not receive an allocation, which is in line with the treatment of larger applications in previous well over-subscribed privatisations.”
In effect, the Royal Mail treatment fulfilled the stated aim of T&T’s divestment thrust by encouraging the “widest possible participation” of the population and favouring those shares of moderate means. The Royal Mail approach also forced individuals of means—some of whom were referred to by the Minister of Finance as “creative”—to acquire their shares in the secondary market rather than at the IPO.
If the Government states up front that it will introduce a similar model with the Phoenix Park IPO, those who sought to game the First Citizens exercise by applying for and receiving a huge number of shares would have second thoughts. The problem with the First Citizens IPO is that people applied for shares worth $10 million expecting to receive shares worth $2 million.
If those individuals knew that if they applied for shares worth $10 million and there is a good chance they will receive no shares at all, there is also good chance they will be more moderate in their applications. One of the interesting things about the idea of capping the purchase of financial assets sold by the State, is that the concept has been used by the Government to sell such assets in the past and is, in fact, enshrined in law.
In the 1964 Government Savings Bond Regulations, which are part of an act of the same name from 1962, T&T legislators said that “a person shall not purchase or hold more than the value of $25,000 in bonds.” The sub regulation clearly refers to an individual, because the next clause makes it clear that: “Notwithstanding subregulation (1), friendly societies, credit unions, trust funds, trade unions and such other bodies as the Minister approves as a person for the purpose of these Regulations may purchase or hold up to the value of $100,000 in bonds.”
Interestingly, the National Tax-Free Savings Bonds Regulations from 1997 imposed a limit of $500,000 on the amount of tax-free bonds a person can purchase or hold. So, there is a precedent for the Government imposing a cap on the sale of financial assets.
On the related note, Independent Senator David Small recently made an impassioned call on the Minister of Finance to re-introduce savings bonds to add to the country’s arsenal of savings instruments.
Here is what the Central Bank document, The Government Securities Market in Trinidad and Tobago, has to say about tax-free savings bonds: “From around the mid-1970s in the context of a relatively high marginal tax regime and a shortage of savings instruments, the Government introduced tax free savings bonds.
“These bonds were issued for the first time in 1977, with maturities ranging from five to ten years. The bonds allowed individuals to deduct the purchase price from chargeable income and also provided for tax exemption of interest income.
“Between 1977 and 1979 the value of the bonds sold was $17.3 million but, by 1987, the amount outstanding on tax free bonds had increased to $314.1 million. With the decline in marginal tax rates as well as changes to the tax system over the 1989-1990 period, tax-free bonds were not well received when they were reintroduced in the mid 1990’s.”
With T&T charging a flat 25 per cent tax rate on income over $60,000 a year (and with the country fairly flush with revenue at the moment), there may not be the fiscal rationale for savings bonds that there was in the late seventies and eighties. But, clearly, any government that offers investors a rate of return that is greater than inflation would be very welcome in T&T.
What about an inflation-adjusted savings bond that pays an interest rate of one per cent higher than the rate of inflation for the previous six months?
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