In light of the Toronto and London Stock Exchanges’ possible merger to create a combined entity with a market capitalization of US$6.03 trillion, JEFFREY GRAHAM predicts prospects for Islamic capital markets in Canada.
In early February 2011, the Toronto and London Stock Exchanges announced that they had agreed to merge, intending to create a combined entity with a market capitalization of CA$5.9 trillion (US$6.03 trillion). The new stock exchange would be the second largest in the world with a market capitalization 48% greater than the NASDAQ. As noted below, the merger, if consummated, also has the potential to substantially enhance the development of Islamic capital markets activities in Toronto.
Background
The London Stock Exchange (LSE), founded in 1801, is the fourth largest stock exchange in the world by market capitalization. For much of the past decade ownership and control of the London Exchange has been in play.
In December 2005, the LSE rejected a GBP1.6 billion (US$2.6 billion) takeover offer from Macquarie Bank. Shortly after Macquarie withdrew its offer the LSE received an unsolicited approach from NASDAQ. Later in the day, NASDAQ announced that it was abandoning its plan to take over the LSE and sold the majority of its shares to Borse Dubai.
Toronto Stock Exchange (TMX), founded in 1861, is the largest stock exchange in Canada, the third largest in North America and the seventh largest in the world by market capitalization.
The Toronto Stock Exchange is the leader in the mining and oil and gas sector, with more mining and oil and gas companies listed than any other exchange in the world.
Assuming that the merger of the LSE and TMX is approved the exchanges will continue to operate under their current names for the time being. Eight of the 15 board members of the combined entity will be appointed by the LSE and seven by TMX. Initially a Canadian would be the chairman of the board.
The current CEO of the LSE would head the new enlarged company, while the TMX chief executive would become the new firm president. The combined entity would be jointly headquartered in both London and Toronto.
The approval process for the proposed merger is complex. Approval from the shareholders of each public company, the Ontario courts and various regulatory authorities are required, including the governments (or agencies) of four Canadian provinces.
Implications for Islamic finance in Canada
The combination of the LSE and TMX has intriguing possibilities for the development of Islamic finance in Canada, given the history and experience of the LSE in this field.
Sukuk
The LSE is a key global venue for the issuance of Sukuk. To date, over US$19.5 billion has been raised through 31 issues of these alternative finance investment bonds.
The LSE offers the choice of two routes to market — the Main Market or the Professional Securities Market.
The Main Market is the Exchange’s flagship international market for established companies and offers access to deep pools of capital and the benefit of a high profile launch.
The Professional Securities Market, which is Exchange-regulated, offers the benefits of listing with more flexible regulatory requirements. It allows the admission of debt securities and Sukuk without the requirement for a full prospectus as only listing particulars are required, and the disclosure requirements are tailored to wholesale needs as they can be governed by domestic GAAP (Generally Accepted Accounting Principles) rather than IFRS (International Financial Reporting Standards).
In addition to the prestige of admitting securities to trading on a truly international and globally respected exchange, allowing companies to raise their profile with investors worldwide and access to a deep pool of capital, London offers the benefit of competitive admission and listing costs.
Shariah compliant companies on Alternative Investment Market
The Alternative Investment Market (AIM) has listed the company shares of four Shariah compliant institutions: Islamic Bank of Britain, European Islamic Investment Bank, The Family Shariah Fund and Shariah Capital.
The AIM market offers smaller growing companies all the benefits of being traded on a world-class public market within a regulatory environment that has been designed to meet their specific needs.
The flexible approach to regulation and the streamlined admission process have made it an attractive market for smaller institutions, including growing Islamic companies, to develop their business.
Exchange traded funds on Islamic indexes
The LSE also has a vibrant market in Exchange Traded Funds (ETFs) including seven Shariah compliant ETFs based on Islamic indexes. ETFs are open-ended index tracking funds listed and traded on exchanges like shares.
They allow investors to gain exposure to a diverse range of assets and offer simple and efficient access to developed and emerging markets, broad and sector indexes.
By trading a single share, users can effectively gain access to an entire index without the burden of investing in each of the constituent stocks making ETFs a highly efficient and cost effective investment tool.
Recent developments
Most recently, in mid-May a group of Canadian banks and pension funds made an offer to buy the TMX in a bid that champions a domestic alternative to the proposed LSE/TMX merger agreement (Maple Offer).
The investors would be Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Caisse de Depot et Placement du Quebec, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, Alberta Investment Management and Fonds de Solidarite des Travailleurs du Quebec.
The Maple Offer would give TMX shareholders 40% of the company, the pension funds 35% and the bank-owned investment dealers 25%. The Board of TMX has rejected the Maple Offer and has indicated that it plans to proceed with the LSE/TMX merger. Nationalist concerns are increasing amid a wave of exchange mergers worldwide, including Singapore Exchange’s October bid for Sydney based Australian Securities Exchange (ASX), which was withdrawn after failing to win Australian government support.
Certain US lawmakers have also suggested that their support for the pending Deutsche Boerse deal for NYSE Euronext of New York was contingent on it being structured as a merger of equals. At this point it is difficult to predict the outcome of the proposed LSE/TMX merger or the competing Maple Offer.
What is clear is that the TMX is going to undergo fundamental change in the coming months and that under one scenario, prospects for a capital market for Islamic finance in Canada are substantially enhanced.
Jeffrey Graham is a partner at Borden Ladner Gervais who heads the firm’s Islamic finance practice. He can be contacted at
[email protected]