Irish exchange faces into a taxing 12 months

Last week the Government moved to incentivise growth companies to use Dublin as a platform for expansion through equity finance.

It is a good example of policymakers responding to international competition in financial markets.

Equity finance is key to any company’s development as it provides long-term non-refundable money that can be used to invest in people, equipment, and marketing.

By securing equity, a company can also access debt to broaden the funding pie which can be deployed in support of expansion. Having routes to equity markets, therefore, is an important piece of armoury for any management team.

Equity is provided primarily by founders, private equity providers, and public equity markets. Founding shareholders tend to be heavily involved in the business. Private equity investors have high hurdle rates and tend to reject over 90% of the business plans put in front of them. Public equity markets are demanding, too, but tend to have longer time horizons and lower annualised return targets relative to private equity investors.

To secure public equity, a company must explore mechanisms that introduce it to groups of potential retail and institutional investors.

Broadly speaking, there are three ways of doing this from an Irish base:

* Work with UK stockbrokers to develop a relationship via the London Stock Exchange and its constituent markets including the AIM;

* Work with a US investment bank to target investors off a platform such as the NYSE or Nasdaq;

* Use an Irish adviser to tap in to investors using the Irish Stock Exchange.

There is a never-ending battle between stockbrokers to seduce companies towards using their home exchanges. That competition has been heightened by tax changes that put the Irish market at a disadvantage.

In particular, it is planned to have stamp duty (a tax on the trading of shares) cut from 0.5% to 0% on London’s AIM in 2014, making that market relatively more attractive than Dublin, where a 1% levy applies.

Ireland has moved to eliminate this stamp duty for companies that choose the Enterprise Securities Market (ESM) in Dublin as a pathway to equity funding. It wrests competitive advantage back to Dublin and allows companies to use their domestic stock exchange to access investors.

The ESM already hosts important growth firms including Origin Enterprises, Total Produce, and Fyffes.

These companies have developed a shareholder cohort that includes large institutional investors in the UK, US, and Europe. Sustained investor relations activity by the companies themselves and research produced by the stockbrokers that trade and research their shares help sustain a secondary market and develop incremental new buyers for shares in the companies.

Having delivered on the stamp duty issue, the Government and its advisers will now closely monitor how the exchange, individual stockbrokers, and companies respond.

Winning mandates to bring expanding Irish companies to investors via the Irish exchange in the next year will validate the stamp duty initiative while helping to further re-energise the stock market.

Having an independent capital markets capability is important for any Republic as it facilitates independent policy and decision making that is in the interests of the State.

If Ireland did not have lock-tight tax rights, it is probable that our 12.5% rate would have been undermined in the past five years.

Although stamp duty on share trading may be a more esoteric subject, having it set at competitive levels is essential in fostering a culture of self determination in capital markets.

* Joe Gill is director of corporate broking with Goodbody Stockbrokers