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Text U05
Text U05
Economics Course
Unit 5: Business Finance
Text (2010 Ed.)
Other forms of finance for these types of business organisations include loans from friends and
relatives. This type of finance may be used when banks are no longer ready to lend money to
certain firms. Another advantage of this type of finance is the informality of the method since the
lender would usually know the borrower and thus, if the borrower is credit-worthy (can be trusted
to pay back), the loan would be made quickly and with little formalities.
A very informal type of finance, which is made use of by all types of firms, is hire purchase. With
this method, a firm pays an initial deposit (down payment) and then pays for the equipment in
instalments (“bin-nifs”) until the full amount is paid. The equipment remains owned by the
supplier and, in the meantime, the equipment is made use of by the firm, which is in fact hiring the
equipment until it pays the full price when it is said to have purchased it. Thus the term ‘hire
purchase’. In this way, a firm need not pay out, say, €10,000 all at one go but it has about two
years to do so. This will give it breathing space (thus, “bin-nifs”) until it makes enough profit to be
able to pay.
Leasing is another method that is gaining more and more popularity in Malta. Leasing is an
arrangement whereby a leasing company buys the assets (equipment, plant, vehicles, etc.)
according to the firm’s requirements and then leases them (hires them) to the firm for an agreed
period and at an agreed rental. The important thing, here, is that the assets remain the property of
the leasing company unlike the hire purchase arrangement where, at the end of the instalment
period, the assets become the property of the firm. An added advantage is that, sometimes, the
leasing company may provide servicing and maintenance. Office equipment, such as photocopiers,
fleets of vehicles and such assets are usually leased by firms especially small firms that would,
otherwise, find it difficult to raise the necessary finance.
Small firms, especially new ones, may also make use of the Kordin Business Incubation Centre
(KBIC) run by Malta Enterprise (www.maltaenterprise.com). The formal incubation period is set
between a minimum of one year to a maximum of three years. After this incubation (start-off)
period, ME also helps to relocate the business and link the client to other forms of finance. This
type of finance, though, is restricted to manufacturing and only in certain target industries such as
Biotech projects and Renewable Energy Sources.
Small and Medium-sized Enterprises (SMEs) may also get finance from the European Union
through programmes such as the Competitiveness and Innovation Framework Programme (CIP).
written beside it. As may be seen there is no year written beside any of the equities since the
money given to the company by the shareholder will not be given back by the company. However
there is a class of shares when the money may be returned to the shareholder. Thus if there is a
year or years near the name of the share, ex. 2014/6, this indicates that this is also a Redeemable
Preference Share, i.e. the money invested is returned to the holder in any year from 2014 to 2016
when the Board of Directors so decide.
Malta Stock Exchange
Like any other stock exchange in the world, the Malta Stock Exchange is a market for existing
(second-hand) securities. This means that companies cannot issue new shares by trying to sell
them on the MSE. Companies have first to sell their shares outside the MSE through what is
known as the primary market. The MSE is, thus, a secondary market in much the same way as the
market for second-hand cars except that the MSE is a centralised and more organised market
whilst the second-hand car market is not. Some famous Stock Exchanges include the New York
Stock Exchange (NYSE), the London Stock Exchange, the Tokyo Stock Exchange, the Paris
Bourse and the Borsa di Milano
You might have heard about the Dow Jones, Footsie, the CAC 100 and other such indices. These
are price indices of the shares traded on the NYSE, the London Stock Exchange, and the Paris
Bourse, respectively. As indices, they indicate, on average, whether prices of the shares traded
there are increasing or decreasing. Thus when you here that the Dow Jones is decreasing, this
means that, on average, the prices of most shares traded on the NYSE have gone down. It must be
repeated that this is only an average indicator and it does not necessarily mean that the prices of all
shares decreased. The MSE Index is the index that shows changes in the average price of the
securities traded on the Malta Stock Exchange (MSE). By publishing this index, the MSE acts as a
barometer of economic activity: an increase in the MSE Index is a sign that economic activity
(production) is increasing, otherwise the investing public wouldn’t buy shares.
As a secondary market for shares and bonds, the Malta Stock Exchange (MSE) forms part of
Malta’s capital market. The MSE was established by an Act of Parliament in 1990, as a body
corporate having a distinct legal personality. Trading sessions commenced in January 1992 once a
week. Nowadays trading is held every day from Monday to Friday in the mornings.
The information that follows was extracted mainly from a booklet issued by the MSE called Malta
Stock Exchange: Operations & Functions.
Market participants can generally be categorised as:
Issuers of listed securities are companies who have issued securities held by the general
public and who sought to have these securities quoted on the MSE in order that they may
be traded on the market. Issuers of listed securities provide the product, which is marketed
on the trading floor of the MSE.
The investing public is made up of those who are prepared to buy or sell listed securities.
Existing holders may wish to sell or, alternatively, potential investors may seek to
purchase securities either from the primary market or the secondary market. Either way,
the investing public expects an organized, fair, and regulated market.
Unit 5: The Finance of Industry- Text (2010 Ed.) Page 5 of 9
…/cont PAUL A. BORG - Economics
The stockbrokers (members) are licensed by the MSE to act as intermediaries who bring
together the issuers and the investing public. The stockbrokers have a responsible function
to fulfil and must be able and prepared to offer an efficient service to their clients.
All securities included on the Official List of the MSE, i.e. all listed securities, with the exception
of Collective Investment Schemes, can only be traded on the Floor of the Exchange. This means
that investors wishing to buy or sell listed securities can only do so through stockbrokers who have
been licensed by the MSE or through a financial intermediary who will, in turn, channel clients’
instructions through a stockbroker. When an investor seeks the services of a stockbroker to buy or
sell securities quoted on the exchange the following procedure is followed:
the client informs the stockbroker of his requirements and after obtaining advice from the
stockbroker, the client will give written instructions as to how he wishes the stockbroker to
execute the order;
the stockbroker shall take all reasonable steps to execute clients’ instructions at the earliest
opportunity and shall always execute orders of his clients on the terms which are the best
available;
when the transaction is successfully completed, the stockbroker shall send the client a
Contract Note detailing the amount and price of the securities he has bought/sold for the
investor and any other relevant details such as the amount of accrued interest (applicable to
bonds only), the amount of commission to be paid to the stockbroker, and whether the
order was received through a financial intermediary, etc.;
clients pay the stockbroker for securities purchased on the Exchange and shall receive
payment from the stockbroker for any sales effected. The amount due or received is the
amount shown on the Contract Note; amounts due to or from stockbrokers are settled by
the stockbrokers through a Malta Stock Exchange Clearing Account and such amounts
must be settled by not later than three working days following the particular trading
session at which the deal was concluded.
The stockbrokers have to perform their duties in accordance with a strict “Code of
Conduct” imposed by the Council and which forms part of the Bye-laws.
When discussing the benefits of the MSE, one has to compare the capital market with a Stock
Exchange to how the market would have been without a Stock Exchange. These advantages, thus,
vary according to the market participants and these include the following:
The issuers of listed securities will have:
the ability to raise fresh capital for new capital projects and/or for further development;
the possibility to unlock value for existing shareholders; and
the means to market their shares and obtain publicity for the company.
The investing public will find:
an organised and well-regulated centralised market of securities;
an equitable and transparent system;
prices that are determined by the forces of supply and demand; and
an efficient clearing and settlement process.
The stockbrokers are provided with:
a market which is properly regulated and supervised; and
an efficient process of obtaining a quicker and less risky settlement.
The Primary Market is that market where new companies issue their shares or existing
companies issue new shares to finance an expansion of their operations. The issue of new shares
cannot be made through the MSE and, thus, the Primary Market is not centralised. There are
various ways in which new shares may be issued to the public.
The first, and only legal way in Malta, is by prospectus. In this case, the company makes adverts
on newspapers and other media to get the public to buy its shares by issuing a prospectus, i.e. a
leaflet showing the future plans of the company and, if it is an existing company, its track record.
This is a very expensive exercise since prospectuses are usually printed on very expensive, glossy
paper since the company wants to give a good image of itself. Full-page adverts on newspapers are
also highly expensive. Sometimes companies get other companies called issuing houses to do this
job for them. These issuing houses sometimes also underwrite the issue, i.e. they guarantee that
they will buy up any unsold shares. There are no issuing houses as such in Malta though some
companies, especially those in the financial markets such as insurance companies or investment
companies, sometimes act as underwriters. Fig. 5.3 shows a public issue or issue by prospectus for
6.25% MGS 2011. As may be seen from the advert, potential buyers may ask for a prospectus, i.e.
a leaflet, or booklet, which shows what the Government will be doing with the money borrowed.
Fig. 5.3: An Issue by Prospectus of
Malta Government Stock.
(Source: The Times, Sat. 21 July 2001)
Another method, which is very similar to the first, is by an offer for sale. The difference, here, is
that the shares are all sold to the issuing house which then sells them off on the MSE since these
have become second-hand shares. This system is not allowed in Malta since the stockbrokers at the
MSE are not allowed to own shares themselves. Like the first, this method is also expensive.
A third, and cheaper, method is by placings. Here, the shares are not offered to the general public
but the company or the issuing house attempts to find persons and institutions to buy up its shares.
It would become expensive if buyers are not found immediately. This is the way used by the Malta
Government to dispose of its shares in Mid-Med Bank plc which was subsequently named HSBC
Bank (Malta) plc although this was not exactly an issue of new shares.
A very cheap method is the rights issue. Here, the company gives its shareholders the right to buy
up a number of new shares by writing to them or informing them at the AGM. Sometimes, a
company uses this method so that it keeps cash in the business since new shares may be given to
shareholders instead of their dividend.
Finally, a company may issue new shares by tender. Here, the company asks the public how much
they are ready to pay for its shares. The advantage of this method is that the price at which the
shares are first sold may be higher than what the company was thinking of selling them at.
In Malta, issues of shares by public companies must be accompanied by a prospectus, even though
some other method may be chosen to sell the shares.
Malta Enterprise (ME) (see Fig. 5.4) is a public corporation set up by the Malta Enterprise
Corporation Act, 2003. It is an integration of another public corporation and two limited
companies being Malta Development Corporation (MDC), Malta External Trade Company Ltd
(METCO) and Institute for the Promotion of Small Enterprise Ltd (IPSE). The functions of ME
are listed in the aforementioned Act. However they may be may be summarised as attracting
Foreign Direct Investment (FDI) to Malta and supporting both local as well as foreign
entrepreneurs operating or wanting to operate from Malta.
The METTTES project will focus specifically on the environmental sector since this is influenced
by legislation requirement like no other sector.
The network (EEN) offers concrete and effective solutions to entrepreneurs and companies in
more than 40 countries, including the 27 EU member states, three EU candidate countries (Croatia,
the former Yugoslav Republic of Macedonia and Turkey), members of the European Economic
Area (EEA) and other participating third countries.
Launched in 2008, the Enterprise Europe Network combines and builds on the former Innovation
Relay Centres and Euro Info Centres (established in 1995 and 1987 respectively). The new
integrated network offers a “one-stop shop” to meet all the information needs of SMEs and
companies in Europe.
Instruments include business partner search within technology and business cooperation databases
and fast access to information on funding opportunities. Individuals make on-site visits to
companies to assess their needs and a broad range of promotion and information material.
Representatives of the network can also help businesses understand EU law, how it applies to their
business and how to make the most the internal market and EU programmes. The Enterprise
Europe partner in Malta is Malta Enterprise. (http://www.enterprise-europe-network.ec.europa.eu)
5.6 Summary
In this unit, we have dealt with finance for private sector firms since firms in the public sector are
financed by government although they may also have bank loans and overdrafts that are usually
guaranteed by the government. In summary it may be said that all types of business organisations
may be financed by internal finance (ploughing back the profits) - in the case of companies,
these are called reserves For external finance, all types of business organisations may use:
Bank loans and overdrafts;
Hire purchase;
Leasing;
Malta Enterprise projects and
EU funding.
In the case of borrowing from friends and/or relatives, this is a method of finance usually
employed by small firms such as sole proprietors and partnerships only.
In the case of companies, there is the issue of shares and bonds, which is a further method of
finance. This is especially so for public companies since these may issue securities to the general
public. Quoted companies have an even better chance of getting the necessary finance than
unquoted public companies. Private companies would borrow from friends and relatives of the
Directors by issuing bonds and selling them to these friends and relatives.