By Ronnie Wonder
Despite the universal recognition that stock exchanges are the most pragmatic and cost effective method of raising capital, firms, especially private sector firms in underdeveloped economies like Uganda have consistently shunned the stock exchange.
As a result, most of the IPOs that have occurred on the exchanges in underdeveloped markets have been state driven, rather than market driven. This indeed is surprising because where these IPOs have been carried out; the offers have, in the majority, been oversubscribed.
From a policy prescription point of view, IPO readiness must be seen as a maturation process and will only be achieved as firms become older and the costs of information gathering fall. But legislation can be used to reduce the costs of information availability by compelling firms that meet stock market listings to file financial statements with a central authority (probably the USE) whether they are interested in going IPO or not.
There is also a need to improve levels of disclosure by firms because these firms occupy an important place in the business space. As firms’ disclosure improves, so will their readiness to go IPO. Lastly, firms need to legitimize their business so as to increase their acceptability as investment vehicles for mobilizing private savings.
Sectors like agribusinesses, and small and medium scale enterprises (SMEs) face challenges that are manifested in two critical areas: poor access by SMEs to long-term institutional credit and lack of equity/venture capital funds
In spite of the immense benefits accruing from dealing in capital markets, which act as vehicles for financial resource mobilization and permit efficient resource mobilization, private companies and individuals have not yet tapped the benefit of accessing this cheaper productive capital.
The slow embracing of the capital market by the private sector can be attributed to various factors but mainly to perceptions of the would be participants who consider the issue of capital market an elitist venture for the very rich.
Paul Bwiso, Chief Executive Officer, Uganda Securities Exchange (USE) speaks to The CEO Magazine on prospects of the securities industry in Uganda. Below are the excerpts:
Describe the private business owners’ perception of the USE
There has never been a formal survey carried out on the perception of the USE among private business owners. However, there is limited information about the stock market generally with many businesses ignorant about the existence of an equity financing alternative with many believing that its only bank loans, MDI’s and money lenders as the only sources of business finance.
How would you describe the appropriateness of USE procedures on listing?
The listing procedures provide a holistic framework with requirements that suite companies’ of all sizes. The procedures will vary depending on companies that have preference for either debt or equity finance. A company that opts for debt finance will adhere to the listing requirements of the Fixed Income Market Segment (FIMS). A company that opts for the equity alternative may either list on the Main Investment Market segment (MIMS) or the Growth Enterprise Market segment (GEMS) depending on the size. Large companies usually list on the main investment market segment while SME’s and start up’s list on the growth enterprise market segment.
What are the pertinent factors that inhibit the listing of private companies on the USE?
• There is limited information about financing alternatives available on the stock market, many private companies are not aware that they can raise money on the market.
• There is also a wrong perception that only large companies can list on the USE, all the sixteen companies that have listed so far are large, the market has not yet got an SME to list on the growth enterprise market segment.
• Some businesses fear the loss of control and are reluctant to sale a stake in their business to outsiders.
• Some businesses fear sharing information with the public and prefer to operate in secrecy. When a company lists, it has to make disclosures.
• There is a fear of the listing exercise which may involve conversion of company MEMARTS from private to public.
• The exercise may be costly since a company has to pay; market advisors, legal advisors and publicity firms among others to get listed.
What efforts are being made to enforce or encourage disclosure among private firms?
This is beyond the control of the USE; the listing requirements encourage and warrant periodic disclosures by the listed companies but are silent on private companies. However, we work with ICPAU, Corporate governance Institute, (FiRe Awards) to promote better Financial reporting of Companies’
Have firms heeded the call to legitimize their business so as to increase their acceptability as investment vehicles for mobilizing private savings
The USE has maintained an outreach program where several potential issuers have been approached and informed about listing procedures and requirements as such several companies with intention to list are undertaking necessary preparations.
What is demutualization and what prompted the adoption of this strategy?
Demutualization is the process of changing an organization from its mutual ownership structure to share ownership structure. The process entails first converting membership into shareholding, which step may or may not be followed by a public issue of those shares. The USE is currently a company limited by guarantee and a successful demutualization exercise would see it become a company limited by shares.
What is the likely impact of demutualization on the stock exchange over the long term?
Demutualization helps boost efficiency and competitiveness of markets. By separating Trading rights from ownership, the independent entity is able to minimize conflict of interest and allow the exchange to access more resources especially if it chooses to conduct an IPO. Demutualization allows the market to access strategic investors who can provide much needed expertise and capital to aid the business.
Will automation lead to more signups from the private business community known largely to being allergic to such innovations that ease doing business?
Automation will boost market activity and liquidity. There will be an increase in the number of trading hours, more flexible dealing spreads and minimum human intervention that usually slows market activity. As the market matures, investors will be able to make real time trades online. Generally the private business community seeks to benefit from an improved investment platform and a deep market that can help businesses access cheap capital as investor participation increases.
