Court orders Capital Markets Authority to pay UGX100m to Tolea Securities for illegally denying them a license Capital markets regulator also told to reverse their decision denying Tolea a license as the decision was based on a wrong set of rules. Court also orders them to re-review Tolea’s license application under proper laws.

Justice Lydia Mugambe of the High Court on Friday 28th February 2020 ordered financial markets regulator, Capital Market Authority (CMA) to pay UGX100 million to Tolea Securities Ltd for wrongfully declining to issue them a license to operate on the ALTX Stock Exchange in Uganda.

The judge wants Tolea to be compensated for the “loss of business and reputation” suffered as a result of the wrongful decision by CMA. She has also ordered CMA to re-review Tolea’s application at no cost to Tolea.

Tolea is a special purpose vehicle set up by various parties that included brokers associated with and or interested in working with ALTX, to issue structured securities from all over the world.  

An Exchange-Traded Fund (ETF), according to Signum Advocates, a financial law firm who represented Tolea, “is a basket of securities that trade on an exchange such as stock that often has an underlying asset. In the case of Tolea Securities ETF programme, the ETFs were pegged to government securities. The said ETF securities were to be traded on the ALTX exchange.”  

Origin of the case

Tolea in December 2017 applied to Capital Markets Authority to be granted a license to trade in ETF Securities as per the ALTX Securities Rule Book v2.0, of July 2016. Tolea further amended their application on 4th January 2018 and in July 2018, but on November 30th, 2018, CMA rejected the application, prompting Tolea to go to court for a judicial review.

The gist of Tolea’s appeal was that CMA had used wrong evaluation criteria on their license- they treated the application as if it were an application for Asset-Backed Securities (ABS), yet it was being made under the ETF procedure. They also argued that CMA had denied them a fair hearing and therefore acted irrationally, unreasonably and illegally.

In her 28th February 2020, ruling Justice Mugambe agreed with Tolea that CMA had “erroneously, irrationally and unreasonably mischaracterised the applicant’s application for an ETF program by evaluating it as an ABS application.”

“The Respondent (CMA) consequently illegally applied the wrong law to the ETF application. As a result, the application was unfairly, unreasonably and irrationally evaluated under the ABS Regulations of 2012 and rejected,” reads part of the ruling.

“By so evaluating it as an ABS, the respondent breached the applicant’s legitimate expectation that the evaluation would be under the ALTX Rules and effectively set the application on a course for rejection since it had not measured itself in the ABS Rules requirements. Needless to say by evaluating this application as an ABS when it was submitted clearly as an ETF, the respondent acted illegally, irrationally and unreasonably to the prejudice of the applicant,” the judge further reiterated.

“Accordingly an order of certiorari is issued quashing the 30th November 2018 rejection decision of the respondent in issue. An order of mandamus is issued directing the respondent to fairly evaluate the application under the ALTX Rules of 2016. Whether filed afresh or not, no costs should be incurred by the applicant for this application,” further reads the ruling.

Mandamus is a judicial remedy in the form of an order from a court to any government, subordinate court, corporation, or public authority, to do a specific act which that body is obliged under the law to do, and which is in the nature of public duty, and in certain cases one of a statutory duty. 

“The Applicant is awarded general damages of UGX100,000,000 for the inconvenience resulting from the illegal, irrational and unreasonable actions of the respondent. The applicant (Tolea) is also awarded costs of this application,” justice Mugambe ruled.

Tolea was represented by Ian Mutibwa, Batanda Gerald and Daphne Butagalanye of Signum Advocates.

Court decision brings hope for growth of financial and capital markets

In a commentary about the ruling, Signum Advocates welcomed the ruling and said it would usher in the much-needed disruption for innovation that would open up financial markets and make them more inclusive to the masses- both banked and non-banked.

“Being the first time the Capital Markets processes were being challenged in court, it was paramount that the precedent set by the court would either curtail or propel innovation in financial markets in Uganda,” noted Signum Advocates.

“What is important is that ETF Securities are not common in Uganda and the court also noted that the subject of securities is novel in Uganda and complex in nature.  The ALTX exchange was targeting investors who are unbanked, banked customers who will likely prefer either to invest outside the commercial bank market to take advantage of ALTX’ flexible trading model as well as speedy and secure settlement procedures, investors who prefer to use alternative banking such as Mobile Money and those wishing for a convenient structured security such as an ETF that saves the investor the complexities and trouble of creating their own treasury portfolio and managing maturity,” further noted Signum.

“It is important to note that Capital markets especially financial markets in Uganda are at a nascent stage. An introduction of the ETF securities onto the Financial markets would perhaps disrupt the said markets and cause the needed disruption to enable the common-man to invest in Government securities as well with ease,” Signum observes.

“By recognising the need for expansion and innovation in the financial markets, the Capital Markets Authority would have contributed to the growth of the financial markets in Uganda and access to investment opportunities to the average Ugandan. The court decision, therefore, brings hope to the growth of financial and capital markets in Uganda,” concluded Signum in their commentary.

The case is also not only a win for financial markets innovation but also a landmark one for Signum Advocates- a relatively new but fast-rising law firm. The firm was singled out by The Legal 500- a UK-based independent, impartial, and international legal research, ranking, and publishing firm, as one of the top law firms in Uganda for being “especially strong in IT and telecoms, with a niche in e-commerce and digital banking.”

Uganda’s capital markets have in the last years registered very low activity largely because of limited participation.  

According to a Uganda Securities Exchange (USE) report seen by this reporter, there was a 12.6% decline in the volume of shares traded- from 674,594,177 shares in 2017 compared to 589,579,887 shares in 2018. Turnover too reduced by 53.24% from UGX95.6 billion to UGX44.7bn while the number of trade deals also went down by 52% from 12,652 to 6,072

Results for full trading in 2019 are yet to be released but turnover, as of September 2019 stood at UGX40.9bn- 5.1% above the UGX38.9bn in the same period in 2018. The number of deals, however, went down by 18.3%- from 4,791 deals to 3914.

The highest turnover recorded at USE in the last seven years was UGX466.4bn in 2014.