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Approval of the Issue of Securities by Regulated Companies PDF Print

Printed in the "Business Monday" newspaper on September 7, 2009 

The Fair Trading Commission is responsible for the regulation of utility services. This primarily involves the setting of rates, establishing standards of service and resolving complaints regarding telephone and electricity services of Cable & Wireless (Barbados) Limited (C&W) and Barbados Light and Power Company Limited (BL&P), respectively. There are, however, other less known areas for which the Commission is also responsible such as the approval of securities, the imposition of fines and penalties for non-compliance with Commission orders and the joint use of equipment. Today we will focus on the approval of securities. 

In the financial structure of most companies, there are likely to be long-term assets serviced by long-term debts. This occurs as companies borrow money in order to replace or upgrade equipment and as a result incur a level of debt. Companies often issue securities such as stocks, shares or debentures.

Under the Utilities Regulation Act, CAP 282 Section 34, the provisions regulating approval of a service provider to issue securities are that:

(1) No service provider shall issue any stock, shares or any debenture or other evidence of indebtedness, payable in more than one year from the date thereof, unless it has first obtained the written approval of the Commission to the proposed issue.

(2) The Commission may grant its approval of the proposed issue in the amount applied for or in any lesser amount and subject to such conditions as it may deem reasonable and necessary to impose.

In the investment world, stocks represent a share in the ownership of a company, while shares refer to each individual measure of the stock you hold and are units of account for various financial instruments. A share in a company normally entitles the company to pay dividends to the shareholder. A debenture is a bond/agreement or an instrument of debt used by large companies to obtain funds, and is executed by a company acknowledging its obligation to repay a sum of money with the interest it carries at a specified date. Regulated companies often issue debentures as a means of raising loan capital. As such, BL&P and C&W are required to make an application to the Commission for approval of the issue of securities including for example details of who will receive shares of stock, what percentage of the corporation each shareholder will own, the borrowing arrangements such as the lender, the borrower, borrowings to date and the purpose of the loan.

In fulfilling its mandate the Commission undertakes a thorough analysis including asserting the impact of the proposed loan and the potential financial risks to the company. There are many financial ratios used by accountants to measure the performance of companies in relation to their ability to service their debts. Three ratios that the Commission may look at in the analysis of financial risk when securities are to be issued are Debt/Equity Ratio, Earnings Coverage Ratio and Cash Flow Ratio.

Debt/Equity Ratio – This measures a company’s financial leverage and is calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. The acceptability of the debt/equity ratio also depends on the industry in which the company operates. For example, the ratio that is acceptable for a capital-intensive industry such as electricity would be different from that of one not requiring the investment of such large sums of money.

Earnings Coverage Ratio – The Earnings Coverage Ratio also referred to as the Interest Coverage, measures a firm’s ability to pay interest and is given as the number of times a company could make its interest payments with its earnings before interest and taxes are paid. An acceptable earnings coverage ratio for an industry depends on the stability or consistency of its earnings. The more consistent a company’s earnings, the lower the interest coverage ratio can be. However, an interest coverage ratio below 1.0 is an indication that the company, regardless of its industry, is not generating sufficient cash to cover its interest payments.

Cash Flow Ratio – Cash flow ratios may be used as an alternative to earnings ratios. The motivation is that a firm’s earnings and its cash flow typically will differ substantially. The ratio shows whether there will be enough cash generated from operating activities to cover interest expense. If a company’s cash flow ratio is less than 1.0, the company is not generating enough cash to repay its current debt obligations.

The responsibility given to regulators such as the Fair Trading Commission to give approval to the regulated company to issue securities facilitates the financial oversight of the company. In this manner, the approval of securities is considered as one of the many ways that the Commission fulfils its mandate of ensuring efficient utility services and safeguarding the interests of consumers.

If you have any questions email us at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or call us at 424-0260. We can also be contacted at our offices at ‘Good Hope’, Green Hill, St. Michael, next to the Anglican Church of the Resurrection.

 
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