I do not know of any country that overcame poverty without operating an active securities market. Listing was necessary but not sufficient to turn the securities markets into key drivers in resolving poverty.
The approach adopted by those who succeeded was to build a supply of securities listings, whilst building a body of investors from the same market.
Kenya has less than 70 companies listed. Uganda has less than 20. Tanzania and Rwanda are not far away from these numbers. It is not surprising that exchanges in our region have not yet figured in the poverty reduction plans.
In Uganda, as in some other countries, some listings were compelled by the government’s power of licensing. If you adjust for the compulsory listings, the voluntary listings per country present a dismal picture. Contrasted with South Africa, which has 400-plus and USA, which has more than 2,000 listed entities, there is more we need to learn and do to get our stock markets on the move and play a significant role in resolving poverty.
Hannington Karuhanga, board chairman, Airtel Uganda, rings the bell during Airtel’s first day of trading on the Uganda Securities Exchange on November 7. PHOTO / FILE
In countries like Uganda, founders hold back because they ask what they would benefit from a listing. Many say that the cost of listing is high, without examining the cost of not listing. Others argue that the governance of most companies is not up to standard, that the book-keeping leaves a lot to be desired and that the transparency demanded by the exchange would expose the listed entity to additional, or unfair tax exposure.
Governance and book-keeping, if not done well, introduce undesirable, or imperceptible costs to the company, while transparency is a desirable cost that opens the way to access to equity and debt capital from the public. I will attempt below to ascribe costs to potential role players in the securities markets.
Founders own shares in the company, which are assets. The company holds their contributions in capital on the liability side of the balance sheet. As the business of the company grows, the value of shares bought initially at a nominal price, become more valuable.
For a company to be listed, the value of its shares is updated regularly. It is very unlikely that the value of a company could drop to that at which it was incorporated. The holder of shares stands to benefit from the difference between the share value at formation and the value pertaining when the company is in full operation. If a company is not listed, the value quoted on the exchange is lost to the founder.
Non-founder investors also stand to in the same way as the founders if the company they invested in does not go public.
Economy
The economy also stands to lose. Gross Domestic Product (GDP) is a common measure of the size of the economy and it is computed in terms of value added. When a company’s shares are not assigned a market value, they would only hold a nominal value. The shares investors hold as assets would never count as a part of the GDP computation.
In countries where securities markets have developed, a tax may be charged on any increase in value of the security that is realised. In other words, trading of securities for a gain, would provide a tax opportunity for the government.
It, therefore, is not possible for the government to collect such a tax regularly when most qualifying companies in its market are unlisted.
Stock exchanges and brokers thrive on the value of assets that they trade on their markets. The more the assets and the higher the value of those assets, the higher the exchanges and brokers can generate.
Therefore, if the bulk of the qualifying companies in a market are unlisted, exchanges and brokers also stand to lose.
So, if all these parties stand to lose, who gains and what do they gain when companies do not list on an exchange?
Joseph S. Kitamirike is the CEO and founder of ALTX East Africa Ltd.
Source: The Daily Monitor
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