By Ayebazibwe Edgar
A stock exchange is an exchange where stock brokers and traders can buy and sell shares of stock, bonds, and other securities. Many large companies have their stocks listed on a stock exchange. Listing on the stock exchange is one way of raising money from the public. To protect shareholders, the law puts measures which company can raise money from the public and how this money can be raised. This is regulated by the Capital Markets Authority.[1]
The word company has no strict legal meaning.[2] Paul L. Davies in his book, principles of Company law, defines a company as, “an association of several people for some common object or objects”[3]. A company is defined under Section 2 of the Company’s Act[4] as a company formed and registered under this Act or an existing company or a re-registered company under this Act. The form and nature of a company are so unique compared to other associations that are identical to the company. This was also enunciated in the locus classicus case of Salomon V Salomon[5] in which Lord McNaughten at Page 52 stated that the company is at law a different person and it has a separate legal entity from its owners. There are two types of companies, public companies, and private companies. It should be noted from the outset that only public companies are permitted to raise capital publicly[6]. The attributes of a private company as provided for in section 5 of the companies Act include a prohibition on any invitation to the public to subscribe for any shares or debentures of the company.[7]
Uganda Securities Exchange and progressive Ugandan economy.
The Uganda Securities Exchange (USE) is the principal stock exchange of Uganda. It was founded in June 1997. During the first quarter of 2010, the USE adopted the Settlement and Clearing Depository electronic trading system, in 2010, the USE was the best performing stock exchange in Sub-Saharan Africa, with an All-Shares Index return of 74 percent between January and November 2010.[8] On 20 July 2015, the USE initiated its electronic trading platform, backed by three independent data servers, cutting to three days (previously five days) the time it takes to settle trades. The Chief Executive Officer attributed the growth to the introduction of electronic trading systems, Settlement and Clearing Depository.
[1] Capital Markets Authority Act.
[2] Paul L. Davies, Principles of Modern company law, 8th ed. (London: Sweet & Maxwell, 2011) page 3
[3] Davies, “on Types and Functions of Companies”, page 4
[4] Act 9 of 2012, Laws of Uganda.
[5] [1897] AC 22
[6] KCC Football Club Ltd v Capital Markets Authority
[7] Section 5(1)(c Companies Act, 2012.
[8] https://www.monitor.co.ug/Business/Business%20Power/-/688616/1082848/-/14xoo0cz/-/index.html last Accessed 29th August 2019.
SCD makes trading much easier and faster than the manual trading system, which was characterized by inefficiencies and high risk. The SCD system is linked with an e-mail notification system that alerts the investor when there is trading activity in the respective account.
For a stock exchange to be vibrant, the economy must be progressive meaning that that the liquidity level should be high, the investment environment must be secure, this means that favorable climate should be predictable and the stability of the currency against other countries’ currencies must be guaranteed. Mostly, investors must be able to invest conveniently through a trusted medium, the travel of information must be fast to enable investors to communicate and make the transfer of securities very easy.
This is done through a Central Securities Depository (CSD), a specialist financial organization holding securities such as shares either in certificated or uncertificated form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. This is usually done electronically, making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after trade had been completed.
MadMan on a Mission: TROI Media's Joshua Kamugabirwe’s Vision for a More Agile, Accountable, and African Advertising FutureOnce the company’s shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value. Some many different ratios and metrics can be used to value stocks, of which the single-most popular measure is probably the Price/Earnings (or PE) ratio. This is through a method known as Algorithmic Trading.
Blockchain – shaking brokers.
The term “blockchain technology” typically refers to the transparent, trustless, publicly accessible ledger that allows us to securely transfer the ownership of units of value using public-key encryption and proof of work methods.
The technology uses decentralized consensus to maintain the network, which means it is not centrally controlled by a bank, corporation, or government. In fact, the larger the network grows and becomes increasingly decentralized, the more secure it becomes.
The information recorded on a blockchain can take on any form, whether it be denoting a transfer of money, ownership, a transaction, someone’s identity, an agreement between two parties, or even how much electricity a lightbulb has used. However, to do so requires a confirmation from several devices, such as computers, on the network. Once an agreement, otherwise known as a consensus, is reached between these devices to store something on a blockchain it is unquestionably there, it cannot be disputed, removed or altered, without the knowledge and permission of those who made that record, as well as the wider community.
Section 1 of the Capital Markets (Amendment) Act defines a stockbroker as” means a person who carries on the business of buying or selling of securities as an agent for an investor in return for a commission. In exchange for executing the trade and offering advice, a stockbroker gets a commission in the form of a flat fee or percentage of the value of the transaction. With blockchain, stoke brokers will be automatically wiped out hence saving the investor from paying brokerage fees.
With blockchain technology, only investment houses would be relevant. According to section 1 of the Capital Markets Authority Act, an investment house means a non-deposit-taking institution licensed by the Authority to advise on offers of securities to the public. Their role would now be to offer professional advice to investors before the purchase of securities.
Blockchain technology has already significantly changed the future of money, finance, supply chain management, record keeping, and more. Not only does blockchain technology support crypto-currencies such as bitcoin and ethereum, but it has the potential to revolutionize both stock trading marketplaces and the way financial data is stored and transmitted around the globe.[1]
Nasdaq, ASX, the New York Stock Exchange, the Tokyo Stock Exchange, the Deutsche Bourse, and India’s Securities Exchange Board, among others, have already either started to use blockchain technology for some of their transactions or have appointed commissions to study the feasibility of using blockchain in the future.
We have at least seen how technology can make stock markets more liquid, during the first quarter of 2010, when USE adopted the Settlement and Clearing Depository electronic trading system. In 2010, the USE was the best performing stock exchange in Sub-Saharan Africa, with an All-Shares Index return of 74 percent between January and November 2010.[2] This was after it integrated technology into its operations.
Stock market traders, brokers, and regulators are required to go through a cumbersome, and expensive, process that typically takes three days or more to complete transactions— mainly due to the role of intermediaries, operational trade clearance, and regulatory processes. Blockchain technology could make stock exchanges much more efficient through automation and decentralization.
Blockchain offers huge potential for tracing securities lending, margin financing, and monitoring systemic risk. Japan’s Financial Services Agency has allowed the Japan Exchange Group, which operates the Tokyo Stock Exchange, to use blockchain as its core trading infrastructure. In 2015, Nasdaq unveiled the use of its Nasdaq Linq blockchain ledger technology to complete and record private securities transactions.
The writer is a Legal Associate at Mwesigwa Rukutana & Co. Advocates and a Teaching Assistant at Uganda Christian University.
[1] https://www.forbes.com/sites/ericervin/2018/08/16/blockchain-technology-set-to-revolutionize-global-stock-trading/#3e886f0f4e56
[2] https://www.monitor.co.ug/Business/Business%20Power/-/688616/1082848/-/14xoo0cz/-/index.html last Accessed 29th August 2019.
