THE LIFTING OF THE UNIT TRUST MORATORIUM. VOL. 1 Issue 2 MAR - MAY 2010 NEWS KNOWLEDGE INFORMATION

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1 O C MPASS. NEWS KNOWLEDGE INFORMATION A quarterly newsletter produced by the Financial Services Commission of Jamaica VOL. 1 Issue 2 MAR - MAY 2010 THE IMF LETTER OF INTENT The Jamaican economy has struggled in the last few years and has experienced anemic growth. The global recession has resulted in a fall in capital inflows to Jamaica as the top three foreign exchange earners Tourism, Remittances and Bauxite have experienced drastic declines. Jamaica s public debt stood debt stood at 135 percent of GDP at the end of 2009 and obtained was an unsustainably high level of debt servicing obligations. As a result, the Jamaican government ( GOJ ) turned to the International Monetary Fund ( IMF ) for financial assistance. In its letter of Intent dated January 15, 2010, the GOJ has committed to implementing policy reforms to fundamentally transform the Jamaican economy and create the 1 conditions for strong sustained growth. The GOJ has, in its Memorandum of Economic and Financial Policies ( MEFP ), outlined its medium term policies for transforming the Jamaican economy. The GOJ and the IMF have developed a 27 month programme designed to meet the policy objectives outlined in the MEFP. Structural benchmarks have been developed and agreed to, two of which include Institutional Fiscal Reform and Financial Sector Reform. The Overseers of the Jamaican financial sector, The Bank of Jamaica ( BOJ ) and the Financial Services Commission ( FSC ) are responsible for the strengthening of the regulatory framework. The GOJ commits to achieving a robust regulatory and supervisory framework for the non - bank sector. Policy objectives have been developed and include but are not limited to: Anti-UFO Legal Amendments Unit Trust Legal and Regulatory Reforms Mutual Fund Legal Amendments Enhancement of Capital and Margin Requirements for Securities Dealers 2 Freeze on New Securities Dealers Licenses THE LIFTING OF THE UNIT TRUST MORATORIUM Enhancement of Stress Testing and Contingency Planning capacity Consolidated Supervision Amendments Implementation of JamClear Central Securities Depository The FSC has, prior to the GOJ initiative, intensified its scrutiny of its licensees and increased its monitoring efforts. This increased monitoring is geared at meeting the targets set out in the MEFP under the Jamaica-Technical Memorandum of Understanding ( TMU ). The FSC, as outlined in the TMU is mandated to provide inter alia the following information: Weekly consolidated balance sheet and individual balance sheets of the core securities dealers, including indicators of liquidity and capital positions; evolution of liabilities, details on sources of funding, including from external borrowing on margin. Monthly financial statements of other (non-bank) deposit taking institutions, insurance companies and pension funds. The FSC embraces these policy objectives and is committed to seeing them achieved. Financial system stability is essential if economic and social stability is to be achieved and sustained. The FSC is cognizant of this and is unwavering in its effort to achieve a financial market that is stable, effective and efficient, where regulatory objectives are met without imposing undue costs to licensees and consumers alike. 1. Jamaica Memorandum of Economic and Financial Policies January Temporary freeze on issuing of new licenses for securities dealers whose business model is based on repos and other short term liabilities, except coming out of mergers and/or acquisitions of existing firms. The eagerly anticipated lifting of the moratorium on the registration of new unit trust schemes and products occurred on Thursday, February 18, The official announcement was made by the Minister of Finance and Planning, Hon. Audley Shaw, in a press briefing held at the Financial Services Commission (FSC). The combined impact of the moratorium on unit trusts and the current inoperability of local mutual funds have had a negative effect on the development of Jamaica s domestic collective investment schemes. As a result the FSC took the decision to facilitate the introduction of new collective investment schemes in Jamaica by recommending the lifting of the moratorium in order to promote further financial market development and additional investment opportunities for local investors. The moratorium was imposed in the 1990 s because the legislative framework which existed at the time was considered inadequate. Therefore, prior to lifting the moratorium it was considered necessary to improve the legislative framework used to govern the entities. The Unit Trust Regulations and a Schedule to the Unit Trusts Acts (UTA) have been amended and gazetted into law. Existing and prospective registrants of unit trust schemes are required to comply with the amended regulations. However, The Unit Trusts (Amendment of Schedule to Principal Act) Regulations 2009, which relate to trust issues, will not immediately affect the existing registrants. The official press briefing announcing the lifting of the moratorium on new unit trust scheme registration took place at the FSC s New Kingston headquarters. Participating in the ceremony were Hon. Audley Shaw (centre), Minister of Finance and Planning, Hon. Emil George OJ, QC (right) and Rohan Barnett (left), Executive Director of the FSC. These amendments reflect the FSC s views regarding safe and sound practices to be adhered to by registrants under the UTA and Regulations. A unit trust advisory setting out the additional requirements to be complied with in order to operate a unit trust scheme in Jamaica has been placed on the FSC s website. Compliance with these requirements will be a material factor in the FSC s assessment of the extent to which unit trusts are being operated in the best interests of the public and, as such, is material to the FSC s decision to register new applicants, or to renew the registration status of existing applicants. In order to register a unit trust scheme or product, the prospective applicant should submit to the FSC a completed application form along with the required documents and the application fee. The application form and document checklist are available on the FSC s website Since, the lifting of the moratorium, a number of institutions have expressed interest in registering new unit trust schemes and products. It is anticipated that, the lifting of the moratorium will assist in the reduction of the high levels of balance sheet intermediation currently being practiced by licensed securities dealers. FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 1

2 CARIBBEAN PEOPLE URGED TO IMPROVE THEIR PERSONAL FINANCIAL FITNESS AT LAUNCH OF REGIONAL FINANCIAL LITERACY WEBSITE A Caribbean economist has urged the people of the region to act now to take advantage of the opportunity magnified by the worldwide global recession to improve their personal financial fitness. This from Therese Turner-Jones, Programme Coordinator of the Caribbean Regional Technical Assistance Centre (CARTAC) which launched a regional Financial Literacy website and a Public Education Programme (PEP) under the brand, Financially Fit at the Jamaica Conference Centre in Kingston on January 22, The global recession presents a perfect opportunity to focus attention on identifying some of the gaps in information as well as some of the resources that people need to help equip themselves to become more financially fit. And the perfect time to act is now, Turner-Jones noted in her remarks at the launch. In describing the Caribbean financial literacy programme, the CARTAC Programme Coordinator said that it aims to educate individuals, consumers, businesses, Central Banks and other stakeholders on the importance of understand personal finances. Essentially we re hoping to create a more educated Caribbean person when it comes to their financial health and being financially fit. The new website is found at It provides Caribbean visitors with easy-to-read overviews of good financial practices, such as monitoring personal spending, establishing emergency funds, and shopping around for the financial services suited for them and points them to other web sites for more information. The site also focuses on famous sayings about money that remind users to focus on financial fitness, and provides links that focus on blogs of real people around the world outlining how they are taking control of their finances. The website also highlights areas unique to the Caribbean, such as the high prevalence of ponzi schemes and encourages feedback through its Ask a Question section where experts respond to questions, sharing answers with all site visitors. Hon. Audley Shaw Minister of Finance & the Public Service addressing the audience. Therese Turner-Jones, Programme Coordinator of the Caribbean Regional Technical Assistance Centre (CARTAC). Partners and stakeholders at the launch and in the PEP include the Bank of Jamaica; the Financial Services Commission; the Jamaica Deposit Insurance Corporation; the Eastern Caribbean Central Bank; and the Financial Literacy Programme of the Central Bank of Trinidad and Tobago. With regard to the role of stakeholders, Turner-Jones noted: Our ability to get this message across to a broad audience relies heavily on the extent to which we can extend the number of partners we have working with us. A number of Central Banks across the region have quite mature programmes. These partners can help us to get the message across and in doing so we ll reach and impact a broader audience. Future plans for the new website include testimonials from Caribbean citizens on how they have personally improved their financial fitness. In addition, content will be re-assessed semi-annually and re-arranged based on input from site visitors. Other aspects of the Financially Fit Public Education Programme include a series of easy-to-read articles on financial health in Liat s inflight magazine, ZiNG, which began in January; a 13-week educational radio series; and a school s essay competition which will be rolled out across the region. FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 2

3 INSURANCE INDUSTRY PERFORMANCE - SEPTEMBER 2009 The major players in the insurance sector are general insurance and life insurance companies. The other players are insurance brokers, insurance agents, insurance consultants as well as loss adjustors. PERFORMANCE OF GENERAL INSURANCE COMPANIES The industry experienced no catastrophes in 2009 and this resulted in a decline in total insurance liabilities resulting in a decline in receivables from reinsurers leading to a decline in the aggregate assets of general insurers from $47 billion at June 30, 2009 to $46 billion as at September 30, In spite of this, the aggregate assets represented a 6 percent increase over the quarter ended September 30, Invested assets remained relatively stable and totalled $30 billion at the end of the quarters ended June 30 and September 30, Aggregate invested assets showed a 6 percent increase over the quarter ended September 30, The industry s aggregate capital base grew by 14 percent in the 12-month period ended September 30, 2009 and by 4 percent during the quarter ended September 30, For the nine month period ending September 30, 2009, total combined revenue increased to $13 billion from the $12 billion for the similar period in Of the three components of total revenue, net premium earned rose by only 2 percent to $9 billion while net investment income and other income grew by $797 million and $609 million to $3 billion and $834 million respectively over the reporting period. PERFORMANCE OF LIFE INSURANCE COMPANIES The life insurance companies experienced growth over the review period as aggregate assets increased to $148 billion as at September 30, 2009; an increase of 25 percent over the corresponding period in Aggregate capital amounted to $37 billion as at September 30, 2009, a 24 percent increase over the period ended September 30, For the nine months ended September 30, 2009, combined net premiums earned of $18 billion reflected an increase of 23 percent over the similar period in Net investment income grew by $9 billion to $16 billion. Total revenue for the industry of $36 billion (September 2008: $25 billion) showed an increase of 44 percent. Total expenses for the life insurers amounted to $27 billion (2008: $21 billion) for the nine month ended September 30, 2009; an increase of 32 percent. Net income before taxes was $8 billion, which was $3.6 billion or 44 percent more than the amount earned for the similar period in Tables 1 and 2 as well as figures 1 and 2 display selected financial indicators for both types of insurance companies. Table 1: Selected Financial Indicators by Type of Insurance Company, September 2009 Category of Insurance September 2009 No of Licensees Total Total Invested Net Premium Net Investment Capital & Assets Assets Earned Income Net Income After Tax Surplus $'B $'B $'B $'B $'B $'B Life Companies General Companies Total Table 2: Selected Prudential Ratio (Insurance Companies) September September 2009 Ratio Sept 08 Dec 08 Mar 09 Jun 09 Sept 09 FSC Benchmark Life Companies Solvency ratio 34.40% 31.30% 31.30% 33.90% 33.90% min of 10% Return on Capital 5.10% 8.40% 6.80% 10.20% 6.40% 0% to 20% General Companies Solvency ratio 46.00% 47.20% 47.00% 46.40% 50.10% min of 25% Return on Capital 3.30% 7.50% 8.70% 5.10% 3.20% 0% to 20% Trend in Key Aggregate Indicators for the Life Companies, September September 2009 Trend in Key Aggregate Indicators for the General Companies, September Septemebr 2009 The higher net investment income was driven by higher interest rates in 2009 and at the same time, other income was propelled mostly by foreign exchange gains. The aggregate total expenses for the nine-month period ending September 2009 was $11 billion, (September 2008: $10 billion). Net income before taxes was $3 billion for the reporting period, representing a 23 percent growth over the amount produced in the $ 'Billions Total assets Total invested assets Capital base Net Income after tax $' Billions Sept 09 Total assets Total invested assets Capital base Net Income after tax FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 3

4 SECURITIES INDUSTRY PERFORMANCE T h e F i n a n c i a l S e r v i c e s C o m m i s s i o n ( FSC ) supervised 47 Securities dealers d u r i n g t h e September 2009 quarter. There are 33 securities firms inclusive of 29 core dealers and 4 Unit Trust Management Companies. This analysis focuses on this group. The sector remains robust as evidenced by growth in capital base when compared with September 2008 and the second quarter of As at September 30, 2009 total capital grew by 10 percent to $50 billion compared to June 2009; this represents a growth of 20 percent over the September 2008 figure. Total assets stood at $517 billion; this represents a less than one percent growth over June 2009 and a 7 percent growth over quarter ended September 30, The securities firms have also recorded an increase in the total funds under management ( FUM ) during the review period. FUM grew by 16 percent over September 2008 and 2 percent from the second quarter and stood at $741 billion. (Table 1 & Figure 1) Net profits of approximately $7 billion were recorded for the first nine months of 2009 representing a 6 percent growth over the first nine months of This growth was buoyed by a 44 percent increase in net interest income which resulted from interest rate levels which were on average approximately 5 percentage points higher than in the corresponding period in Interest Income remains the main revenue earner for securities firms accounting for 91 percent of total income generated during the review period. The FSC monitors the adequacy of each firm s capital as well as the quality of the assets backing investors liabilities. The sector is adequately capitalized and has remained robust during this turbulent period. Investors should be heartened by the fact that for the industry as whole, there are adequate assets backing their investments, as the low risk asset to repo liabilities ratio is above the FSC s minimum benchmark and has remained relatively stable throughout the review period. Table 1: Selected Financial Indicators by Type of Securities Licensee, September 2009 Category of Securities September 2009 No of Licensees Total Assets Net Interest Income Net Income Capital Base FUM $'B $'B $'B $'B $'B Securities Firms Non-Securities Firms Of which: Commercial Banks & Building Societies Merchant Banks Insurance Companies Others Total Figure 1: Trend in Key Statistics for Securities Firms ($ B) September September 2009 $Billion Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Quarter Total Assets Capital FUM Repo Liabilities Figure 1: Trend in Key Statistics for Securities Firms September September 2009 Ratio Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 FSC Benchmark Capital / RiskWeighted Assets 49% 39% 41% 48% 54% 10% Capital /Total Assets 9% 8% 8% 9% 10% 6% Intermediation Ratio 36% 33% 34% 34% 34% 50% Low Risk Assets/Repo Liabilities 133% 128% 124% 129% 128% 100% FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 4

5 STATUS OF APPLICATIONS FOR APPROVAL OF SUPERANNUATION FUNDS AND RETIREMENT SCHEMES The approval process for Superannuation Funds and Retirement Schemes has progressed at a reasonable pace for approximately 3 1/2 years. Applications have been submitted continuously to the Financial Services Commission and as at 1st March 2010, 328 complete applications for the approval of Superannuation Funds have been received. Complete applications refer to those applications which were submitted with all the requisite accompanying documents, 205 (63%) of these applications have been approved. Of the 123 applications which have not yet been approved, 55 have already been presented to the FSC s Board Pensions Committee, however, due to the deficiencies in the accompanying Trust Deed and Rules, the applicants have been given 90 days within which to amend the documents in order to comply with the prescribed requirements of the Pensions (Superannuation Funds and Retirement Schemes) Act. The remaining 68 applications are now being processed and will be submitted to the Board for approval as soon they meet the required criteria. The FSC has received 13 applications for the approval of Retirement Schemes of which 11 have been approved and 2 are being processed. POOLED PENSION FUNDS The Pensions (Superannuation Funds and Retirement Schemes) Act (Investment Regulations) ( the Regulations ), provides for the investment of pension assets of superannuation funds and retirement schemes in Type I or Type II Pooled Funds. A Type I Pooled Fund is an investment fund which is established specifically for the investment of assets of more than one approved superannuation fund and approved retirement scheme. The fund must be established and operated by licensed investment managers. There are 2 conditions: o The fund must not hold any investments which would be deemed ineligible or prohibited for an approved fund or scheme under the Pensions (Superannuation Funds and Retirement Schemes) Act, ( the Pensions Act ). o The fund must not be a party to or engaged in any transaction prohibited for an approved fund or scheme under the Pensions Act. A Type II Pooled Fund is an open ended investment fund, mutual fund, collective scheme or unit trust, and any investment fund other a Type 1 Pooled Fund. NEW REGISTRATION REQUIREMENTS The Financial Services Commission ( FSC ) released a bulletin on January 27, 2010 which details recent procedural changes made by the FSC which impact the following: 1. Stale-dating of fit and proper documents (stale dates changed from 3 to 5 years for police records and other fit and proper documents); 2. Persons deemed eligible to verify copies of academic records; and 3. Information required in relation to character references for applicants (written references are no longer required but names and contact details of referees must be provided). The bulletin can be downloaded from the FSC s web-site at sections/document pdf PENSIONS INDUSTRY PERFORMANCE As at September 30, 2009 total assets for the pension industry stood at $224 billion representing a 4 percent growth over the June 2009 quarter. 25 Investment Managers, licensed by the FSC, are responsible for the investment of these assets subject to the investment policies of the pension plans. Approximately 60 percent of the investment portfolio is invested in Government of Jamaica ( GOJ ) securities. FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 5

6 INVESTIGATIONS AND ENFORCEMENT ACTIONS 2009 With the task of protecting users of financial products and promoting stability and public confidence in the operations of financial institutions in the areas of insurance, pensions and securities, the FSC engages in providing a medium to hear complaints and queries, conducts investigations, and enforces compliance with the relevant Acts and regulations where required. For the year 2009, the FSC received a combined total of 194 complaints related to the three industries. Only 45 of these 194 complaints were unresolved during During the same period, the FSC conducted 70 investigations into breaches of the relevant Acts and regulations and have taken enforcement actions, where necessary, to ensure future compliance. The FSC received approximately 500 complaints related to unregistered securities entities during These complaints resulted in 20 investigations being conducted into the affairs of these entities. Table 5 represents the number and matters of the investigations conducted during calendar year Tables 1-3 below show the number and nature of complaints received in the calendar year 2009 for each industry. Table 1: Number and Nature of Complaints for Insurance Industry, Nature of Complaints Claim not honoured by insurer Delay in claim settlement Amount of settlement Liability disputed Refund of premiums 2 4 Lapse policy 0 1 Value of paid up policy 3 0 Related to other uncategorized issues Total Number of Complaints Table 2: Number and Nature of Complaints for Securities Industry, Nature of Complaints Unfair dealing with client 4 2 Related to other uncategorized issues 4 9 Table 3: Number and Nature of Complaints for Pensions Industry, Nature of Complaints Payment of benefits Winding up/termination of plan 0 1 Operation of plan 1 0 Conduct/Action of Trustees/Administrators 0 2 Related to other uncategorized issues 1 4 Total Number of Complaints In addition to the complaints, the FSC also received a total of 52 queries relating to the pensions industry. Table 4 shows the issue and number of the queries received. Table 4: Subject of the Queries for the Pensions Industry, 2009 Subject of the Queries 2009 Registration 5 Eligible Investments/Investment limits 5 Winding-up 7 Retirement Schemes/Phase II 7 Reporting Forms 7 Awareness/Clarification of Provisions 21 Total Number of Queries 52 Table 5: Number and Descriptions of Investigations, 2009 Description of Investigations 2009 Fit and proper 17 Insurance: Pursuant to Insurance Act & Regulations Unregistered insurance intermediaries (Section 70) Compensation to unauthorized intermediaries (Section 85) Placement with unregistered insurer (Section 20)... Securities:Pursuant to The Securities Act & Regulations Unregistered securities entities (Section 7) Unregistered issuer of securities (Section 26) Total Number of Investigations Total Number of Complaints 8 11 FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 6

7 5 Annual th Jamaica Stock Exchange Investment & Capital Markets Conference The 5th Annual Investment & Capital Markets Conference was held for the first time in Kingston at the Jamaica Pegasus Hotel from January 18, 2010 to January 20, The conference theme was Revival and Renewal: Growth Frontiers for the Regional Capital Markets. Highlights from the conference included the Keynote address of the Hon. Audley Shaw, Minister of Finance & the Public Service at the official opening of the conference. In his speech the Minister addressed various elements of the proposed IMF programme, namely: 1. Measures to enhance fiscal responsibility including the sale of loss making state owned entities (e.g., Air Jamaica and Clarendon Alumina Production) and the implementation of a central treasury management system for public bodies; 2. A comprehensive debt management strategy that includes a voluntary debt exchange aimed at reducing interest costs to the government; and 3. Reforms to further strengthen the financial system, e.g., amendments to the laws governing unit trust schemes which would ultimately allow greater diversity in the financial markets since these changes would lead to the lifting of the decade old moratorium on unit trusts. Another important piece of this reform would be amendments to enhance the capital requirements of securities dealers. The Minister also stated that a time of crisis is a time of opportunity. These were profound words which no doubt reverberated in the minds of conference participants as they listened to the other featured presenters. The first of these was Dr Marcelo Guigale, economist with the World Bank. Dr. Guigale pointed out that the Latin American and Caribbean (LAC) region dodged a bullet in 2009 since there was only minor damage to their economies following the fallout from the worst global economic recession in over 50 years. Dr. Guigale suggested that the following dynamics would prevail in LAC economies in coming years: 1. Fiscal policy in LAC countries will be more closely linked to growth and there could be more examples in the future of the approach adopted by the Chilean government of saving money in the good times and spending more in the bad. It was noted that this approach by the Chilean administration yielded positive political and economic results. 2. LAC region had the opportunity to increase its penetration in world trade but this could only be achieved by raising the levels of investment in research and development. The Asian countries had more than doubled their penetration of world trade over the past 17 years and this was largely the result of the introduction of innovation and the development of brands which naturally followed their significant investments in R&D. Professor William Megginson, the Reinbolt Chair in Finance at the University of Oklahoma, gave a highly informative presentation on The Global Privatization Experience. Prof. Megginson s presentation pointed out one way to reconcile the important and often conflicting objectives of (1) fiscal restraint and (2) the stimulation of economic activity this reconciliation could be achieved through a programme of privatization of state owned entities (SOEs). Professor Megginson revealed that the rationale for privatization was based on four factors: poor economic performance of SOEs; SOEs unending need for subsidies which in some cases amounted to as much as 10% of GDP; the potential revenue that governments can raise through privatization; and empirical data which supported the view that privately owned entities were generally more profitable and efficient than SOEs. The only downside with a massive programme of privatization of SOEs is the subsequent slight reduction in employment. Out of the various methods for executing a privatization programme, Prof. Megginson s preference was Share Issue Privatization (SIP) which entails a public offering of shares in the SOE. A SIP not only raises money for a government but it also has the prospect of raising the level of activity on a stock market. Presentations were made by Rohan Barnett, Executive Director of the FSC and George Roper, FSC s Deputy Executive Director. The conference was well received and deemed to be a success. George Roper, Deputy Executive Director of the FSC delivers the wrap-up speech at the JSE Conference. Marlene Street-Forrest, General Manager of the JSE hands over a prize to Fabian Sanchez, conference participant and FSC staff member. FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 7

8 PREPARING TO LIST ON THE JAMAICA STOCK EXCHANGE JUNIOR MARKET Authored by: Janet E. Morrison Attorney-at-Law DunnCox 48 Duke Street Kingston Much has been in the media about the recent establishment of the Jamaica Stock Exchange Junior Market. The opportunities this presents for Jamaican and other CARICOM Small to Medium Sized Enterprises (SMEs) are fairly attractive and include: - Access to capital on the open market; - Expansion through equity rather than debt; and - Full tax exemption on profits for the first five years after listing and thereafter tax on 50% of profits for an additional five years. These opportunities are in addition to advantages presently enjoyed by all listed companies which include an exemption of transfer tax and stamp duty on the transfer of shares traded on the exchange and/or exemption from withholding tax on dividends. The only method by which an SME may list is by making an Initial Public Offering (IPO) which requires the filing of a prospectus. A prospectus is basically a statement to the public of the past performance, the present status and the future prospects of the company. The procedure for the issue of the prospectus, which in some cases may be complicated, time consuming and expensive. This has now been somewhat simplified by the use of a shelf prospectus and other documents required for listing posted by the Jamaica Stock Exchange (JSE) on its web-site. The effect of this initiative is to make the IPO less daunting. The JSE has announced that the listing fees will also be up to 50% lower than the fees payable by a company to list on the Main Board. The basic requirements for an SME to list are that upon listing the subscribed voting share capital must be no less than $50M or more than $500M and it should have at least 25 participating voting shareholders holding no less than 20% of its issued share capital. Where a SME fails to maintain at least this minimum share capital and the number of shareholders the JSE Rules provide that they will be delisted. An SME may also have a mentor on the board prior to listing which, as the word implies, is a person who holds the proverbial hands of the company through its tenure on the JSE by guiding and assisting it in being compliant with the requirements of being a listed company. However, an SME is required to be eligible to apply to list and to ready itself to do so is somewhat like a child preparing for First Communion! That is, it must be in a particular state to be admitted to the fold. Firstly, where an SME is a private company it must convert to a public company because: - a private company may not have more than 20 shareholders and to list, as mentioned above, it must have at least 25 shareholders, and, - a private company may not make an offer to the public to subscribe for its shares but a public company may do so in accordance with the requirements of the Companies Act. Secondly, where an SME has articles of association it will be required to adopt new articles of incorporation which contain certain provisions mandated under the JSE Rules. The Rules include a provision that there may be no restrictions on the right to transfer the shares which is an important criterion for any company that is to have its shares traded across the floor of the stock exchange. Thirdly, on the conversion of an SME to a public company, it must have at least a minimum paid up share capital of $500,000 in order for the company to obtain a certificate from the Registrar of Companies to carry on business. Fourthly, the profit and loss accounts and the balance sheet statements for five years preceding the issue of the prospectus must be available for auditors to prepare a report on the financial status of the company to be published in the prospectus for the scrutiny of the public invited to invest in the company. Fifthly, where the SME is a family company which normally comprises a small board of family members and/or connected persons, the board should be reconfigured to comprise at least three members, preferably with at least one non-executive director who has a reputation for good corporate governance and business acumen. A competent secretary must also be appointed to serve the board. Finally, the board of an SME should prepare itself to accept the fact that as the board of a listed company it has to change its mind-set from accountability to a few to accountability to potentially hundreds of shareholders and that the company will be required to file quarterly and annual financial reports with the JSE on a timely basis. Failing compliance with these and other JSE Rules, the company may be delisted and be required to pay back the taxes from which it was exempted. To list or not to list will therefore likely be one of the most significant decisions an SME will make as it involves a mix of business, legal and emotional issues. Generally however, listing can be uneventfully achieved and the advantages from a tax perspective are enticing. A private company planning to go this route may now therefore start the process of preparing itself in advance of listing. FSC COMPASS A PUBLICATION OF THE FINANCIAL SERVICES COMMISSION PAGE 8