Home' Trinidad and Tobago Guardian : July 13th 2014 Contents JULY 13 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
NEWS | SBG3
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-
Minister Howai suggested---in a Q&A inter-
view published in the BG View space on Thurs-
day---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 intro-
duction 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 sub-
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 invest-
ed 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 Cit-
"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 Ordi-
nary 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 includ-
ing 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
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
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 Reg-
ulations, 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 reg-
ulation clearly refers to an individual, because
the next clause makes it clear that: "Notwith-
standing 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 mar-
ginal 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?
Considering the Phoenix Park IPO
Purchase cap could prevent First Citizens mistake
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