Oran Hall | Two paths to list, two different results

Recently, West Indies Petroleum Terminal Ltd and Dequity Capital Management Ltd set out on different paths to ultimately list their ordinary shares on the Main Market of the Jamaica Stock Exchange. Today, one is listed. The other is not.

West Indies Petroleum succeeded, but Dequity Capital aborted its effort when it became clear that it would not have been in a position to make the application. Now, only one company and its shareholders are reaping the benefits of listing.

There are five methods by which companies can list on the Jamaica Stock Exchange (JSE): prospectus issue, offer for sale, offer by tender, placing, and listing by introduction. The latter is the only method by which none of a company’s shares is offered to the public.

On the other hand, an initial public offer (IPO) is not a listing method. Companies use it to offer shares to the public for the first time, and it allows them to meet the minimum listing requirements in regard to share capital and the number of shareholders. These are as follows: issued nominal value of the shares of $250,000; at least 100 shareholders owning in their own right at least 20 per cent of the issued shares; and total share capital of at least $200,000, with the ordinary share capital being no less than $100,000.

Whereas West Indies Petroleum used the listing by introduction method, Dequity Capital opted first to have an IPO because it wanted to raise capital for debt reduction and then apply to list. Failing to realise the minimum subscription of J$500 million that it aimed to raise, it cancelled the offer.

Is it not interesting that through the IPO, Dequity Capital was able to gauge demand for the shares? Demand in an IPO generally gives a clear indication of future market response. Had Dequity generated sufficient demand to the point of an oversubscription, it would not take a crystal ball to see that the price would likely have risen, perhaps sharply, had it made it to the market.

Listing by introduction does not offer such a peek into future demand when the stock is listed. Neither is there any indication of future supply. I would not be surprised if the shareholders and directors of West Indies Petroleum were swept off their feet by the response of the market to the newly listed company.

Although it is the shareholders who pocketed money from the sale of shares, West Indies Petroleum is benefitting from its new status as a listed company. Listing allows its shares to trade, thereby widening ownership. Being listed allows the price of its shares to be determined in a transparent way. Its name is more recognisable given the higher visibility listing provides. The rules it must abide by as a listed company challenge it to engage in governance practices of a very high standard, and the surging of its stock price has raised its market capitalisation — its issued shares multiplied by its share price — exponentially, ranking it among the biggest companies listed on the Jamaica Stock Exchange.

As for the shareholders, the very warm market embrace of the stock, evidenced by the sharp increase in the price, due in part to limited supply, has brought a very significant increase in their net worth. Add to this the improvement in the liquidity of the shares because the stock market provides a means to find buyers and the greater potential of shareholders to borrow more against them as their value appreciates.

Notwithstanding the sparsity of supply, new owners of the company, by adding the shares to their portfolio, have added to diversification to create and grow their wealth. And it is not just individuals who stand to benefit when the company does well. Life insurance companies and their policyholders, members of pension funds, investors in unit trusts and mutual funds that invest in equities, and other institutional investors are poised to reap good benefits to the extent that the company delivers strong results.

The response of the market to West Indies Petroleum shows that there can be excitement even when there is uncertainty. There is a limit, though, to how far the market will drive the price of a stock even if supply is limited and its prospects look good.

Regardless of the approach used to list stocks — directly or by going to the market with an IPO before applying to list — the best thing investors can do for themselves is to do their homework, especially by doing their research and keeping a clear head while doing so.

Oran A Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com