The main reasons that countries promote stock exchanges are :
- As a means to raise capital for local businesses;
- For developing the financial sector (as a source of jobs and economic growth);
- To directly generate revenue for the government (stamp duties, tax on transactions and so on).
Most countries find the first factor most important, whereas cities like Hong Kong and Singapore have managed to grow their financial sector to become a major segment of the economy in terms of jobs and business generation. The third factor normally would be a secondary consideration, since the major benefits of a successful stock exchange are incurred from the first two factors. However, some times a successful stock exchange can generate a sizeable revenue for the government directly in addition to the benefits reaped from the first two factors. For example, even though Hong Kong only levies a 0.1% duties on the value of stock transactions, revenue from this source is estimated to be about 10% of the government's total projected revenue for 2008/9 (assuming stamp duties from stock transactions make up half of the stamp duties collected), or over USD$2 billion. This is not a one-off payment, but recurring in nature, although the amount may vary from year to year.
There should therefore be significant benefit to the economy if the Philippines could grow its equity market, which, at the moment, is suffering from:
- anaemic local interest in investing in the stock market;
- limited number of listed companies or products.
Which one should we tackle first, if we want to grow the Philippine stock market? The first problem certainly looks more serious than the second, with such low local participation in investing. The second problem, however, may be easier to tackle. The first step being the elimination of the 4% tax levied on Initial Public Offering.
Indeed, it is very hard to understand why any government would want to discourage its companies from raising capital. While companies are working so hard to try to reduce the cost of borrowing or increase profit by even as little as half a percent, the 4% tax on IPO proceeds is incomprehensible from any public policy perspective. Most governments would find it more beneficial to the whole economy to encourage more stock market listing.
3 comments:
Weak and inefficient economies usually resort to higher taxes as it has less revenue generating alternatives.
Workers in countries like Hong Kong and Singapore pay less in income tax versus someone in the Philippines. This is almost always true in relative terms and generally true in absolute terms.
The best minds in the region tend to go to countries like Hong Kong and Singapore and leave countries like the Philippines.
I’ve come up with a number of advices that would help grow the stock market of our country:
1. Clean up the system
- Make our “market” a leveled playing field by eradicating insider trading and financial statements of companies reflecting completely their real values. I’m not an expert when it comes to this but I suggest companies to be monitored stringently by external auditors and company rules should be set up when it comes to using internal information as leverage in buying stocks. Perhaps a dedicated study on examining the current system and how to improve it would generate specific answers on how we could address the problems of our “market’s” system
2. Increase “market” awareness
- I believe that this could be done by including this as a mandatory curriculum or a mandatory topic in high school, in college, and in companies in our country with the level of depth of the subject matter increasing as the life stages progress. Aside from including it in the curriculum, information should be easily accessible to the majority of the population by increasing exposure of the people to our “market” by including and increasing airtime of market-related news.
3. Correct people’s perception about the market
- Again, the best thing to do this is by bringing this closer to the people and conducting free seminars that would change the views of the people about the market. Thus, it would really take great dedication from the authorities to improve the status of our “market”
4. Lessen transaction costs
- The brokers would definitely be hit by this proposal. A more efficient way must be made so as to improve making transactions, thus lessening the cost of doing so. This would entice investors as they would have greater unrealized wealth due to the reduction of money that would be deducted from their investments. With investors having increased their unrealized wealth, greater trading volume would occur.
5. Provide tax incentives
- Both companies and investors should be given tax incentives when they would go public and invest in the stock market, respectively. This could be done by lessening the taxes imposed on the companies that are to be publicly listed and by making the portion of the salary of an investor that would be invested tax-free as long as he would allocate it to buying stocks in the PSE, which would then be taxed for realized gains or the appreciation of the value of the stocks so as to avoid double taxation to the hard-earned salary of the employee. Cash dividends should also be tax-free as it was previously already by the tax rate imposed upon the company. This would entice investors to invest in the market and companies to go public.
6. Create/ promote products for the different SECs
- I highly believe that many perceive that the stock market is only for the rich due to the amount of the initial investment that should be made. However, there are already existing products or investment schemes that caters to the lower brackets of the SEC. The only problem is, again, awareness of the people about this. Some of the products or investment schemes out there that could be affordable to the majority of the population are Citisec’s 5k-peso initial investment for the stock market and adding the same principal per month or depending on the desire of the person, the 1k mutual fund program of AIG where people could pool their funds with as little as one-thousand peso initial investment, and the Pera Act/ Pera Bill which was signed by the President last August 2008. All of these make investing in the stock market accessible to the lower classes of SEC which increases the investment base that could be pooled in into the market by fund managers or investors.
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