Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, May 03, 2007

Looks like a win-win: abolish stamp duty

A lower cost of capital, the perennial concern for IRO's, would be achieved if stamp duty was abolished. So goes the argument in new research published this week by a remarkable group. Investors – through the ABI and IMA, and the City, through the LSE and City of London Corporation have joined forces to publish new research from Oxera.

The key conclusion is that abolishing stamp duty would cut companies' cost of capital, enabling increased capital expenditure, which would boost GDP by up to 0.78 per cent. This in turn would raise corporation tax by up to £4bn, counteracting the loss of £3bn of tax from stamp duty. The change would also trigger a jump in share prices, according to the research.

One potential side effect is in the bane of IRO’s lives – Contracts for Difference. The argument that many users advance in defence of these cash-settled derivatives, which carry no disclosure obligations for the purchaser outside of an offer period, is that they are tax efficient. Being exempt from stamp duty makes them particularly attractive for hedging purposes.

However, as many an IRO has found, CFD’s also allow covert stake building. Hedge funds in particular can build stakes of 4% or even greater, without telling the market. Then when an offer period commences, or management access is required, the position is suddenly revealed. Some companies believe - but cannot prove – that up to 30% of the stock is held in this form.

A major concern is also for an orderly market. If a substantial block trade appears, with no counter party, the market will operate without full knowledge of the trade – and potentially reach the wrong conclusions.

So, given that a key argument for CFD’s has been their exemption from stamp duty, will its abolition – if the Treasury agrees – lessen their use?


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