The six-year drought in listings at Uganda Securities Exchange

For close to six years now, the Uganda Securities Exchange has had trouble in attracting more listings despite companies seeking new avenues to raise money.
Early last month, Cipla Quality Chemicals started the process to launch an initial public offering (IPO) that will see the drug manufacturer float more than 657 million shares.

Stock market
Put simply, the stock market refers to the collection of markets and exchanges where the issuing and trading of equities or stocks of publicly listed / held companies, bonds and other classes of securities take place.
This form of trading of securities company shares treasury or corporate bonds is either through formal exchanges or over-the-counter (OTC) market places. Also known as the equity market, the stock market world over is one of the most vital components of a free-market economy.
It provides companies with access to capital in exchange for giving investors a slice of ownership in form of unit of shares they own in a company.

Listing happens in the ‘primary market’, where a portion of a company’s shares are made available to the public. The company often uses the listing to raise funds through issuing new equity shares (an Initial Public Offering or IPO). Investors can then buy and sell these listed shares in the ‘secondary market’.

The chief executive officer of Capital Markets Authority (CMA), Mr Keith Kalyegire in an interview with Prosper magazine, said CMA has come with new strategy which it aims at having frequent listing of companies on the Uganda Securities Exchange frequently than it has been if companies buy into the idea.
“We have come up with three to five year resource based programme. We have resource persons in place moving to different parts of the country conducting public education, educating the corporates the importance of listing their shares on the stock,” he said.

Mr Kalyegira added: “We have so far had educative discussions with eight companies out of 15 that we have plans to conduct and the meetings have yielded positive results, which gives us hope that there will be more companies listing on USE in the near future.”

Mr Kalyegira said CMA resource persons are actively talking to companies and conducting training sessions for corporates to understand the importance of raising capital through the stock exchange.
“We have had three general training session with the corporates to increase the level of their awareness about capital markets, our plan is for the resources person to have 20 training session with corporates we see they have potential before end of the year,” he said.

One of the biggest advantages for a company to have its shares publicly traded and having their stock listed on a stock exchange are being able to raise additional funds through the issuance of more stock, companies can offer securities in the acquisition of other companies, stock and stock options programmes can be offered to potential employees, making the company attractive to top talent.

The other advantages are: companies have additional leverage when obtaining loans from financial institutions, market exposure - having a company’s stock listed on an exchange could attract the attention of mutual and hedge funds, market makers and institutional traders, indirect advertising.

The filing and registration fee for most major exchanges includes a form of complimentary advertising, this is because the company’s stock will be associated with the exchange their stock is traded on.

Brand equity - having a listing on a stock exchange also affords the company increased credibility with the public, having the company indirectly endorsed through having their stock traded on the exchange.

Mr Kalyegira explained that going public and offering stock in an initial public offering represents a milestone for most privately owned companies, pointing out that a number of reasons exist for a company to decide to go public, such as obtaining financing outside of the banking system or reducing debt.

“The owner of business needs to understand that raising capital through the capital market/stock market is a cheaper, better and the best way of raising a patient capital for their businesses so they need to adopt market based financing and reduce on bank financing, which really constrains cash flows compared to the equity which is permanent loan in the secondary market,” Mr Kalyegira explained.

Last year, Capital Markets Authority launched a ten-year Capital Markets Development Master 2016/17-2026/27, which aims at developing Uganda’s capital market industry.

USE
Mr Paul Bwiso, the chief executive officer of Uganda Securities Exchange, says to increase products in the market, it is marketing the listing of companies on the Main Investment Market Segment (MIMS and the Alternative Investment Market Segment (AIMS).
“We want to diversify them [products] on both market investment segments; particularly for the AIMS, which is purely for SME. We are simplifying the rules at USE to encourage them to list,” he said.
“We are also advocating with government to release to companies that were supposed to list their shares on USE through divesture process to do so such that we can have more companies listed on the securities exchange,” he added.

Mr Bwiso also says the exchange is encouraging companies (private equity) to exit the market through the stock exchange rather than selling their shares to other companies.

Currently, there are 16 companies listed on USE with eight being locally listed and the other eight being cross-listed from Kenya. By the end of last week, USE total market capitalisation closed at Shs26.271 trillion.

The main reason companies decide to go public, is to raise a good chunk of money and spread the risk of ownership among a large group of shareholders. Spreading the risk of ownership is especially important when a company grows, with the original shareholders wanting to cash in some of their profits while still retaining a percentage of the company.

Unfortunately, in Uganda the pace of listing on the stock is extremely very slow currently in a space of five years before another company lists it shares. But what explains this drought of public offers at USE?

Investor perspectives
Mr Richard Byarugaba, the managing director of National Social Security Fund (NSSF), told Prosper magazine that although NSSF would like to increase its investment in the stock market, there are limited products in the stock market currently.

Mr Byarugaba said NSSF’s total investment in equity market across East Africa is Shs1.7 trillion out of its Shs10 trillion portfolio.
“Currently, we are facing the problem of limited investment products in the stock market because there are few companies listed on Uganda Securities Exchange (USE) we would like to increase our investment in the stock market from about Shs1.8 trillion to Shs2.5 trillion of our current total portfolio of Shs10 trillion,” he said.

Mr Byarugaba said companies are not listing on USE because most companies are family-owned.
As a result, most are afraid of losing 100 per cent control in the company.
“Companies are also not listing because they fear taxes and the requirements of the Capital Markets Authority which require companies to have a track record of profitability before going in the market,” he stated.

Mr Byarugaba said Uganda would be having more companies listed on the stock exchange if all the companies which were privatised listed their shares on USE as it was in the divesture process.
“Most of these companies like Barclays, Kinyara Sugar never listed their shares in line with government public divesture process,” he said.

Going forward, Mr Byarugaba said government needs to give incentives to investors in the stock by providing holidays and removing or lowering withholding tax on investment in the stock market.
Stock exchanges can contribute in two main forms - promoting good governance in business practices and promoting investment.

EXPERT VIEWS
How a well-developed stock market can raise capital. Group executive director of MBEA broker services Rwanda/MBEA holding Limited, Mr Andrew Owniny, in an interview said a well-developed stock market helps companies to be transparent and supports sustainable development because funds needed for development can be raised through the market.

In order to increase the number of companies listed on the stock exchange in Uganda, he said government needs to create an enabling environment/ policies that encourage issuers (companies) to understand to what extent they should go in the market to issue bonds or sell shares.

“To the investor side, there is need for clear public education for them to understand the importance of investing in the stock exchange as a way of inculcating the culture of long-term investment and saving through the stock market,” he said.

Stock markets provide investors with a comparatively easy means of exiting their investment, in that the shares listed on a stock exchange can be sold in the secondary market. Investors do not have to identify a specific buyer for their securities nor do they have to negotiate the terms of the sale as these are determined by the rules of the market. This reduces the risk for investors (savers) in putting money into an investment with different time horizons than their own investment horizons.

Mr Owinye explained that there is need to have big institutional pool of capital in Uganda’s capital market through Retirement Benefits Authority like the one of Kenya which regulates pension funds.

He said in the various investment schemes and inside the scheme, there is a portion of funds put aside for investment in the stock exchange and it spread bands of investment by investors in the stock market either in equities or bonds.
“When there are many institutional investors, you still need critical mass of people, for instance there are over 500 schemes in Kenya who invest in the stock market we need to get there. The more institutional investors and government put money in the stock exchange the better,” he said.

Uganda’s stock market
Requirements to list
A company intending to apply for a listing on the Uganda Securities Exchange must conform to the listing Rules and regulations as stipulated in the continuing listing obligations. These obligations require that for the company to be admitted to the official list, the following information shall be disclosed in an information memorandum or prospectus for an application for securities being listed on the Exchange;
• A prospectus setting out the information contained in Appendix 1 to these USE Listing Rules 2003 which are available Here
•Letter of no objection from the industry regulator of the issuer (if the company operates in a regulated industry);
• Board of directors’ resolution to list
• Shareholders resolutions in respect of the offer
• Capital Markets Authority approval letter
• Contracts entered into in connection with the Issue
•Underwriting agreements if any
• Contracts with registrars where applicable
• Certificate of incorporation of the issuer or any other incorporation document
• Declaration by the sponsoring broker in the form set out in Appendix 6 of the USE Listing Rules
• Memorandum and Articles of Association of the Issuer or any other constitutive documents which must comply with the requirements of the Securities Exchange whether or not required by the law;
• Copies of the documents provided for inspection pursuant to the proposed issue
• Financial reports for the three to five year period preceding the issue
• A list of existing shareholders
•Management contracts if applicable
• Letter of undertaking of the issuer
• Material contracts
• A Reporting Accountant’s report. For the avoidance of doubt, the reporting accountants report shall be prepared by a firm different from the one carrying out the audit of the issuer.
• For an applicant that is already listed on another and is applying to list by way of introduction, a letter of no objection must be submitted from the regulator and stock exchange of the primary market where the applicant’s securities are listed.
• Following or immediately prior to listing, at least 20 per cent to 25 per cent of the shares much be held by not less than one hundred shareholders excluding employees and direct family members of the issuer.
• The company should be engaged in substantially the same business and management, and share control throughout the last three years before the application.
• The securities for which listing is sought, must be freely transferable, subject to any restriction that may be imposed by written law. Have only one class of voting shares, which shall be offered at the exchange.
The name, history and description of the company’s interests and activities.
• A report by the company’s auditors in respect of the last completed financial years (five for the first tier and three years for the second tier) of the company if the company has been in existence for three, five or more years.
•Forecast earnings and dividends.
• Details of share capital structure, loan capital and the borrowing powers of the company.

Challenges
The major challenges facing the country’s capital markets include: lack of marketability and information, unawareness of local investors about the listing requirements on USE, very high fees rules at Uganda Stock market exchange, shareholders’ fund increment from time to time, majority of the population being unskilled on how to invest in the stock market trade.`