Raising capital and attracting investors by issuance of shares

The Dar es Salaam Stock Exchange (DSE) is a premier listing destination for companies in need of long term source of capital in our country. As is, most people recognise the importance of the DSE, yet they know very little about it. People are vaguely aware that the exchange stands at the heart of the financial system and the economy. Many people knows that the exchange can be a formidable force to reckon with when it comes to facilitating economic growth of a society — facilitating businesses and the government to raise public money for financing the growth of business enterprises and other development projects. As for investors, such as employed people, either directly or indirectly (knowingly or not), do actually invest their savings in the exchange’s listed instruments via collective investment schemes, pensions, retirement annuities, directly through having an account at the exchange, etc. Despite this, it is also true that the DSE is still seen as a remote and a curious place, like a casino or a gambling and speculative place — as I alluded into in my last week’s article, rather than being seen as something tangible and real in impacting our social and economic development.

Even for policy makers and more active investors, much of the inner workings and operations of the DSE are still a mystery. Sure, many people knows that the exchanges facilitates capital raising, that it has a platform for trading of shares and bonds as well as their settlement, but most often than not, the knowledge about DSE to many of us, stops just there. And therefore, with the cloak surrounding the exchange, its processes and workings, etc it is important that we invest in growing our awareness about the exchange so that we can shape a different future as far as having a stock exchange in our midst is concerned.

With such an introduction, so, how does the Exchange relate to businesses?

We will respond to this question by asking another question: why does a company issue shares? Why would founders of businesses be willing to share the business profits and business secrets with other people when they could keep these profits and secrets to themselves? The reason is that at some point every company needs to raise money, as capital. This is normally done in order to expand and/or grow the business such as when the company wishes to introduce a new line of business, a new product or service line, a new branch, etc. To do this, companies can either using internal profits retained over a period of time for the purpose, or can borrow money or raise capital by selling part of the company, which is commonly known as issuing shares. A company can borrow by taking a loan from a bank or by issuing bonds (commonly called corporate bond). Both bank loan or issuing bonds fit under the umbrella of “debt financing.” On the other hand, issuing shares is called “equity financing.” Issuing shares is advantageous for the company because it does not require the company to pay back the money or make prearranged interest (or coupon) payments along the way. The shareholders normally get dividends and the hope of capital gains. The first sale of a share, which is issued by the private (now changed into a public) company itself, is called the initial public offering (IPO).

It is important that we all understand the distinction between a company financing through debt and financing through equity. When an investor buy a debt investment such as a bond, he or she is guaranteed the return of your initial investment along with promised interest (coupon) payments. This is not the case with an equity investment. By becoming an owner, an investor assume the risk of the company, in case the company is not being successful during a particular period. Just as a small business owner is not guaranteed a return, neither is a shareholder. As an owner of a company that has issued shares, in which you have invested into your claim on assets of the company is lesser than that of creditors and lenders to the company (business). This means that if a company goes bankrupt and liquidates, you, as a shareholder, do not get any money until the banks and bondholders have been paid out. On the other hand, it is important to remember that shareholders earn a lot if a company is successful.

Why should one invest in shares?

For the most part, as mentioned above, the reason we invest in shares is to achieve long-term goals. History has proven to us that share markets outperform any other investment over the long-term and this a compelling reason to invest in shares. There are several objectives and reasons why people invest in shares and these reasons are different for each person depending on life circumstances, age and specific needs. Some people invest in shares to obtain capital growth. Others invest to obtain a regular income such as a dividend,

We may invest in shares to obtain both an income and capital growth. Shares offer the potential for both strong capital growth (which are tax free for the case of DSE listed companies and regular dividend income (of which DSE listed companies pay half the tax compared to non-listed companies) and they provide protection against inflation.

So, again why do we invest in shares and what factors do we need to consider regarding the investments we make?

The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorised according to the fundamental characteristics of safety, risk, and return – which also correspond to types of a common investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Here we examine these types of objectives, the investments that are used to achieve them, and the ways in which you can incorporate them in devising a strategy.

Safety, risk and return

There is no such thing as a completely safe and secure investment. We can get close to ultimate safety for our investment funds through the purchase of government-issued bonds and bills (commonly known as Treasury Bonds and Treasury Bills) in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the top and larger (Blue chip) companies that dominate their particular markets in the country. Such securities are arguably the best means of preserving capital while receiving a specified rate of return because they are perceived to be low risk.

Investing in shares is riskier than purchasing government bonds, but there is also a greater chance of a higher return because of the increased risk. Taking-on greater risk demands a greater return on your investment. This is the reason why shares have historically outperformed other investments such as bonds or money market instruments.

Over the medium –to- long term, investment in shares has historically had better returns than other investment types. Great proof of the power of owning shares is as was presented in the last few months where some of the DSE listed companies’ returns (capital and dividends) in some cases have gone beyond 20 percent per annum, a growth that is more than twice the GDP growth or inflation rate.

Return (Income/Dividend)

However, the safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice some level of safety if they want to increase their yields. This is the relationship between risk and return: as return increases, risk goes up, and vice versa.

In order to increase their rate of investment return, and take on risk above that of money market instruments (such as bank deposits and treasury bills) or government bonds, investors may choose to purchase corporate bonds or preference shares with lower investment ratings.

Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it’s just to keep up with the rate of inflation. But maximising income return can be the main objective for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income generating assets, such as pension plans.

Capital gain

So far we have discussed risk and return as investment objectives, and we have not considered the potential of other investments to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from return in that they are only realised when the security is sold for a price that is higher than the price at which it was originally purchased. (Selling at a lower price is referred to as a capital loss.)

Therefore, investors seeking capital gains are not likely to be those individuals who need a fixed, ongoing source of investment returns from their portfolio, but rather, those who seek the possibility of longer-term growth. Growth of capital is most closely associated with the purchase of shares, particularly growth shares, which offer low yields (dividends) but considerable opportunity for increase in value (emanating from reinvestments of current profits for future value creation and growth). For this reason, growth shares generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip shares, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income, and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any share able to provide the near-absolute safety and income-generation of government bonds.

Share Issuance, A Tool of Financing Football Sports (II)

A couple of readers of my last week’s article, about shares being used as an effective tool of financing football, said I had gone a bit far ahead into the topic and requested if I could step back and try to elaborate the concept of shares: what is a share, who can issue shares, who can invest in share, what does owning shares mean, etc. So, in today’s article I will do exactly that, but prior to doing this let me recap of what was a major theme of my last week’s article:

I said, club ownership may take different forms and each has its benefits and drawbacks; i.e community ownership of a club; fans ownership of a club; or company ownership of a club. I said a company is a legal entity with all of the rights of citizenship, except for the right to vote; that companies, in essence, are considered “artificial beings” created by the law and given all of the rights in business that individuals enjoy. In a company, shareholders (who owns shares in a company) owns the company. That companies are governed and overseen by a board of directors who are chosen among shareholders or represents shareholders interests in a company.

Shares in a company could be publicly traded in the stock exchange, such as the Dar es Salaam Stock Exchange; but shares and the company may elect not to be listed or traded on a stock exchange. If a company is not listed, then shares can not be publicly traded, but could be privately traded among individuals. Shareholders benefits by receiving profits in the form of dividends from the company. Although the company might retain some current profits to increase investments in future profits; the goal of most companies is to maximise the value of shareholders interests. The board of directors, elected by shareholders, makes general policies for the company and addresses the use of profits, among others matters. The benefit of company over other ownership structures is that it limits owner’s liability, in the sense that investors can loose their investments, but they are not legally liable for any fiscal losses and can not be held financially responsible in any lawsuit against the company, except for shareholders who are also directors.

So, what is a Share?

Plain and simple, shares represent ownership of a company. A share represents a claim on the company’s assets and earnings (or profits). As you acquire more shares, your ownership stake in the company becomes greater, for example a shareholder with 51 percent ownership of a company will have greater stake, more voting power and decision making power compared to a shareholder with 1 percent ownership. Whether you say shares, stocks, equity, it all means the same thing, they are just different terminologies.

By buying a share, money, which could have been idle or otherwise, held in low interest earning savings in banks and other financial institutions and instruments moves to a more productive economic activity. In a football sport, the productive economic activity can be funding of sports facilities such as a sports arena, a ballpark or a stadium, can be investment in people/players or I can be investment is sports technology. In either way, if one is a football sports fan and/or is a member of a club, his/her disposal income could be better used this way, than laying idle somewhere in the house.

Being an owner

Holding a company’s shares means that you are one of the many owners (shareholders) of a company, and, as such, you have a claim to everything the company owns. Yes, this means that technically you own a relative part of every piece of the club’s stadium, every machinery and equipment, every trademark, and every contract of the company, every player’s contract, every furniture, cash held in the bank account of the company, etc. As an owner, you are entitled to your share of the company’s earnings (profits) as well as any voting rights attached to the shares.

A share to the company is represented by a share certificate, (or a CDS Receipt for shares listed in the Dar es Salaam Stock Exchange), a piece of ownership of a company. When you buy a share, you become an investor (or a shareholder) and thereby an owner of a piece of the company’s assets, debts, profits or losses.

One thing to note though — being a shareholder of a public company (a company listed in the stock market) does not mean you have a say in the day-to-day running of the business, as opposite to a sole proprietorship, or a partnership or even a private company or as a member of the club. Instead, one vote per share to elect the board of directors, to approve appointment of auditors or to approve audited accounts at annual meetings is the extent to which you have a say in the company.

For instance, being a DSE PLC shareholder doesn’t mean you can call up DSE’s Chief Executive Officer and tell him how you think the DSE should be run. In the same line of thinking, being a shareholder of TBL doesn’t mean you can walk into the factory and grab a free case of beer, in the same vein, being a shareholder of Simba Sports Club doesn’t mean you call the manager and tell him which player you would prefer to be hired by the club or which player should play in the next match.

The governance and management of the company is supposed to increase the value of the firm for its shareholders. If this doesn’t happen, the shareholders can vote to have the Board, and in some cases, the management removed from governing and managing the company. As a shareholder to a company, you don’t have to work to make money, management works for you and also you don’t have to sweat about which strategic direction should the company take, through the board of directors, which you elected those kinds of decision are made, all for your benefits and in protecting your interests.

This last point is worth repeating: the importance of share ownership is your claim on assets and earnings. Without this, the shares wouldn’t be worth the paper it’s printed on.

Another extremely important feature of shares is its limited liability, which means that, as an owner of a share, you are not personally liable if the company is not able to pay its debts. Other businesses such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners personally and sell off their houses, cars, furniture, etc. Owning shares means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.

I will finish by saying, despite their popularity, most people don’t fully understand shares — many would think it is something of speculative in nature like a gamble or a casino. But that is not the case, that’s why you have probably heard comments from relatives and friends saying: “Marwa’s uncle made a killing in DSE shares, and now he’s got another hot tip…” or “Watch out with shares-you can lose everything in a matter of days!” So much of this misinformation is based on a get-rich-quick speculative mentality. This has been some misinformed people within our societies to sometimes people think that shares are the magic answer to instant wealth with no risk.

Shares can (and do) create massive amounts of wealth, but they aren’t without risks. The key to protecting yourself in the share market is to understand where you are putting your money. It is for this reason that we have initiated and embarked in this kind of thought leadership programs: to provide the foundation you need in order to make investment decisions yourself. Yes, you might need to seek investment and financial advice from more sophisticated and trained individuals, but you will have the basics. What applies to a manufacturing company, a telecommunication services company, a mining operations company, a bank, a stock exchange — as a company where people can invest their money by way of share ownership, the same applies to the company that owns a football sports club — it is about understanding the fundamentals of a commercial enterprise before you embark on investing in it and owning shares to a company.

Equity (shares) Financing for Sports

Even for some of us who are not good football fans, have recently taken note of some developments in this aspects of sports — the matter of financing our football clubs and their ownership. Discussions have ranged from share ownership, to leasing of a club for a period of time, to debt financing, etc. We had to take note because these three key words i.e. club’s ownership by way of shares purchase, or leasing a club for a shared return on investment or debt financing of club’s activities are financial terms, whose broad meaning may not so understood to many of us as they represent financing mechanisms for enterprises as well as determines the manner in which businesses are owned, financed and operated.

As is for any form of businesses, football sports organizations included, and I may be corrected, are entertainment enterprises. I understand professional football sports teams sells entertainment for an income, they are (or may be) businesses whose investment can be financed through various means; equity financing, debt financing, lease financing, members’ contributions, corporate sponsorships, etc. For obvious reasons, I will limit this article to equity (share) financing.

Before I dwell into share financing, it is important we underscore the fact that, in whatever form of financing — success, progress and revolutions anticipated depends on plans and strategies as to what is it that a club intends to achieve, for example why the need for financing, and why in this form and not the other? what is it that funds will be used for? is it for funding of sports facilities such as a sports arena, a ballpark or a stadium in which games are played and hence provide the quality of experience that such facilities will offer to fans? is it for investment in people/players or is it for investment is sports technology? what is it for? — the answer to these questions will inform the choice of financing tools; for example, if the need for funds is to construct a stadium, then many sports strategists would recommend teams to “Stadium Bonds”, which may be a better option because bonds, especially under special-purpose vehicle (SPV) structure and “ring-fenced” revenue sources, typically offers investors a periodic repayments compared to share financing. Shares issuance are not often used in to pay for facilities (such as stadium) construction, why? mainly because of ownership restrictions and public involvement which make share financing less desirable and unnecessary.

And once financed — what kind of governance and management structure that the club/company will pursue to guarantee investors returns? where will the money to repay investors returns come from? Yes, the usual revenue sources for sports clubs are: tickets sales; sponsorship revenues; merchandising sales, media outlets/audiences fee, etc — but the real question is, how will these revenue streams be well managed so that investors returns are guaranteed? I presume these questions can properly be addresses, now let’s focus into the intended topic, shares ownership in sports clubs.

Issuing of shares means selling a percentage of the company to an investor or investors in exchange for cash that gets invested so that periodically the company give its investors profits. For publicly traded companies, equity (or share) financing means that the company will sale shares to many people, sometimes with minimal choice as to who should be a shareholder. For a sports club to sale shares, like for many other business formations i.e. sole proprietorships, partnerships, companies limited by guarantee, clubs; cooperatives, etc it has to change its legal form into being a company limited by shares — such a company may choose to be either a private company or a public company. A public company is the one that invites members of the public to subscribe into its share capital, it may then be publicly traded by being listed in a stock market, or not. I will come into this later.

As we know, club ownership may take different forms and each has its benefits and drawbacks; i.e (i) community ownership, (ii) fans ownership or (iii) company ownership. Let us briefly describe the first: community ownership; this is not so common in professional sports, this despite the fact that community ownership of a club does not necessarily mean that the team will be a publicly traded company, no — it may either be a publicly traded company or a club owned by local organization or a local government may own a team in one way or another. It could also mean local residents owns some forms of shares in the team. When this exists, there is usually some local board that control the team and it may be operated through either a local government, or a municipal or city, or another entity, or a community organization. As said, this is not so common as a means of club or team ownership.

Fans ownership — there are many examples and experiences of a club being owned by fans which then allow fans to make key decisions about the club. I would not dwell on this, because it is commonly known.

In company ownership form: let me start by clearly stating that, a company is a legal entity with all of the rights of citizenship, except for the right to vote; companies in essence, are considered “artificial beings” created by the law and given all of the rights in business that individuals enjoy. Normally, companies are governed and overseen by a board of directors who are chosen among shareholders or represents shareholders interests. Shareholders (who owns shares in a company) owns the company. Those shares could be held by a single individual, or a small group of family members or unrelated individuals, or by many people. The shares themselves could be publicly traded in the stock exchange; but the shares and the company may elect not to be listed on a stock exchange. If a company is not listed, then shares can not be publicly traded, but could be privately traded among individuals. Shareholders benefits by receiving profits in the form of dividends from the company. Although the company might retain some current profits to increase investments in future profits; the goal of most companies is to maximise the value of shareholders interests. The board of directors, elected by shareholders, makes general policies for the company and addresses the use of profits, among others matters. The benefit of company over other ownership structures is that it limits owner’s liability, in the sense that investors can loose their investments, but they are not legally liable for any fiscal losses and can not be held financially responsible in any lawsuit against the company, except for shareholders who are also directors.

So, what have we said? what we have tried to say so far is that shares represents equity financing in a company where in return investors depends on the dividend payments that will normally rise and fall according to the company’s performance. Shares also gives investors the voting rights and decision making power to a company — this is very critical for any company’s governance and decision making, those will majority shareholding in a company has more power for decision making compared to those with minority shareholding or mere members and fans of a club, but who are not shareholders.

If by issuing shares, the company will elect to be listed in a stock exchange (such as the Dar es Salaam Stock Exchange) and publicly traded, the following are some of the benefits: a potential for capital growth following appreciation of shares prices where shares are efficiently priced based on market forces; it enhances more transparency and good governance of a company for its own growth and sustainability; there is a potential for issuing more shares or corporate bonds in the case of any future needs of financing by the company; listing into the stock exchange provides an efficient exit strategy for shareholders who would want to liquidate their investments and exit from the company at any moment; it also provides free publicity to a company mainly because listed companies tends to attract media attention; listed companies tends to attract and retain good employees — people likes the prestige that goes with working in a company that is listed in the stock market; and it is easy for mergers and acquisitions to be arranged for a listed company compared to non-listed, this aspect is key for enterprise growth that is non-organic. In the case of Tanzania there are several fiscal (i.e. tax) incentives provided by the government for both listed companies and its shareholders.

Despite of many benefits that accompanies a company that sales it shares and get listed into the stock market, there are some perceived disadvantages as well; i.e. the cost of issuing shares can be costly in some cases; going public can be a burden on the company; all inside information is open to competitors (team’s prices, margins, salaries, and future plans); owners may not own 50 percent or more of the business — this makes it easy for key shareholders of a company to be voted out by others; with a listed company strategic flexibility may be limited; and accounting and tax requirements may somehow be expensive. In many cases the benefits of being listed outweighs the perceived disadvantages.

Finally, for one to tell how much money is for what percentage of ownership of a company which owns a club — valuation and hence share price based on various analysis has to be thoroughly carried out by professional investment advisers.

Why Rules and Regulations are Necessary for the Thriving Financial Markets

A few days ago, I was asked by an investor to make sense of one more case where a licensed market player, an intermediary in the capital market, failed to comply with the settlement requirement, as set by the market in line with requirements and obligations attached to his license. This was a situation where a stockbroker had failed to make timely settlement of the cash leg on a transaction whose securities leg had been settled in the Exchange’s systems — hence shares had moved to the new owner while cash had not been transferred to the seller of shares. In a similar fashion, few months ago, an investor who had put money in a new upcoming company that was approved by the regulator and the market to conduct an Initial Public Offering (IPO) with a promise to subsequently list these shares into the stock market — unfortunately for this company and its well-meaning investors, the IPO was not successful and hence the requirement for the company’s promoters to return funds collected back to those who had subscribed during the IPO. The issue raised by this well-meaning investor is that it had taken well too long for the issuer to return back the investors’ money. We all know the case of the company called National Investment Company Limited (NICOL), whose poor corporate governance situation and its non-compliance to continuous listing obligations, forced the Exchange to delist the company from the stock market about five years ago. Since then, there has been several queries by investors about the goings of this company. Despite, being marred by several court cases, fortunate for investors — the light towards the end of the tunnel for this company and its investors is in the horizon, we are being told.

It is for some of these incidences that I write this article.

As much as there has been a historical constant battle to maintain high levels of integrity and competence in the financial markets, capital markets included. It is good to know that the financial markets (services) industry had recognised this to be the truth long time ago — that it is in its own best interest that it fiercely engage in this battle so as to establish the minimum set of behaviour and standards for its institutions, its intermediaries as well as the users of these financial services. That is why, the Dar es Salaam Stock Exchange, being a self-Regulatory Organisation, i.e. an institution that regulates its members — comprising of listed companies, Licensed Dealing Members (stock brokers) and Custodian Banks; have various sets of rules that regulates the conduct of its members in their various stages of engaging with the stock market. Having rules and regulations to regulate the conduct of its members is necessary for the stock market mainly because, if users of financial services (i.e. investors in listed companies) develop a fear that malpractice is prevalent in the stock market, they will not allow their funds to flow through the stock market system and the stock market, even if it were for only this reason, will shrink. If the conducts of the issues related to the stock market were to be left into the gentlemen’s agreement, assuming that all participants have good intents and that they will behave ethically, then we would have created a room where crooks and incompetents would have loved to join and become industry’s intermediaries where they could free-ride on the industry’s reputation. Thus the need for regulations, rules and minimum standard of conduct becomes a necessity, despite the costs involved. Below are further arguments as to why we need rules and regulations as the financial market:

It is a common phenomena for directors, managers and officers working with companies that in one way or the other deals with the matters of stock markets, (i.e. stock market’s listed companies, the stock markets, stock brokers, investment banks, custodian banks, investment advisers, etc) to have an information set that is often superior to the information possessed by investor’s or by stock markets intermediaries client’s. This asymmetry of information, can lead to exploitation, or in some cases even financial failure; take an example of a situation where investors in the stock market’s listed company are unable to assess the true risk of their investment and returns, simply because the relevant information that would have enabled them to assess and make sound judgement based on various aspects of their investment is possessed by a few or is only shared to a small group — it would be unfair and chaotic. Now, in order to avoid or minimise such incidences, rules and regulations are being put in place so as to ensure investors or users of financial services are as equally treated and are not disadvantaged.

The other key reason why rules and regulations are important is that, financial markets institutions say banks or stock markets (and its members), is that in often cases the failure of one company or one intermediary may lead to the failure of others, this situation of systematic failure may lead to instability in the whole system. In our recent memory, for this kind of phenomena is the failure of Lehman Brothers in 2008. The failure of Lehman Brothers led to contagion effect, with very serious consequences not only for the United States financial system, but for the overall global economic health where businesses failed to meet their obligations, banks and businesses collapsed, investors wealth were eroded, insurances and pensions were lost, etc. However, from the 2008 situation, we also have learned that, as much as having rules and regulations in place is necessary, so is the supervision of these regulations — that is the ability to monitor the position and behaviour of players and enforcing the regulations if and when require — however, all in all, rules and regulations remains necessary.

One more key reason for having rules and regulations is that, many markets and players in the market, if left to their own devices, would tend to move towards a structure where one or a few players exerts undue power to the market, affecting its pricing mechanism in favour of a few over many. If not well managed, this undue influence, creates the desire for beneficiaries to control price of a product. In the case of a stock market, this will be the situation where an individual, or a few individuals or an institution manipulates the price mechanism in the stock market by controlling liquidity and the price of a listed stock towards a direction of the choice of the influencer.

Again, it is for such reasons where regulations and market supervision becomes necessary — i.e. developing the mechanism to protect many against exploitation of a few. Now, it may fairly be asked — who should regulate the market? to this question — there are three possible answers: the industry itself (i.e. stock markets being a self-regulatory organisations with the power of regulating its members); the government, or a government agency (such as Capital Markets Authorities). Either of these has its advantages and otherwise.

What is Needed for a Company to Raise Share Capital

I will be the first to admit that raising money for a company by selling of shares to the public is a relatively complicated business, and it rightly should be — because public money, as opposed to share capital raised through private placement, has to be protected. And therefore, there are so many factors to consider in order to properly coordinate a successful process of raising capital by issuing of shares to the public, in a process called Initial Public Offering (IPO). There are numerous legal issue, standards, rules, and regulations to be observed; in addition, the marketing of the IPO to potential investors requires a team of advisers to organise and execute, this is to mention but a few.

There a handful of advisers that assist the company in accessing public money via IPO and subsequently floating of shares on the stock market for the first time. The same applies when helping a company raising additional share capital in years following the initial public offering. The intent of this article, is for me to try to describe the IPO process and the role of various advisers in the IPO process and in the listing. Later in the article, I will therefore describe the role of: a lead adviser, sponsoring broker, legal adviser, reporting accountant and registrars, all these have a role to play in the IPO and listing of the company to the stock market. But before I describe the role of each of these advisers, let me explain the gist behind raising share capital and listing into the stock market.

When a company reaches a certain stage and in a certain size, based on listing conditions as set by the capital market authority and the stock exchange, it has the possibility of accessing public money via issuance of shares and subsequently floating those shares in the stock market (or stock exchange). The action of accessing public money by issuance of shares is sometimes referred as going public, through issuance of new shares, this act is famously known as the Initial Public Offering (IPO). To become a listed company is a major step for a company progress, and the substantial money obtained normally accelerates the company to a new phase of growth. So, on one hand the floating of shares to the public opens the door for fresh possibilities of investment finance from outside investors who brings money that facilitates the company growth and development, and on the other hand this process brings the disadvantage for current shareholders giving away some influence and control — an action called dilution of ownership.

The legal implications of obtaining a listing into the exchange and the continuos listing obligations includes the requirements for the commitment by directors to certain rules, standards of behaviour and levels of reporting to shareholders. Joining, either the Main Investment Market segment or the Enterprise Growth Market segment of the Exchange has two meaning: 1. the company being admitted to the Official List of listed companies in the stock market; and 2. the company’s shares are admitted by the Exchange for trading, i.e. providing shareholders a platform for buying and selling shares of the company that they have invested into.

As it is with other financial transactions, going public entails some transaction costs such as fees to the regulator, fees to the exchange and fees to advisers. These costs, as proportion of the amount raised varies but is usually at least 5 percent — some of the IPO and listing costs are fixed, hence the large the size of the capital to be raised the less proportionate the costs related to the transaction. Despite the costs involved in the process of raising share capital and listing into the stock market, many companies consider the stresses and the costs involved in this process as worthwhile because listing into the exchange brings numerous advantages to the company besides raising of capital. These benefits includes: providing shareholders (both anchor and new shareholders) with a dynamic, transparent and a liquid secondary market for trading their shares and liquidate their investments in an efficient manner whenever they want; the benefits also include raising of the company’s status and visibility into the public and its various stakeholders — banks, government agencies, its customers and clients, its suppliers and creditors, etc; listing of the company furthermore provides the company with a possibility of non-organic growth of its business following potential merger with other companies who could see the potential of the company via the publicly available information following its listing.

All companies that obtains an approval to list into the Main Investment Market of the Dar es Salaam Stock Exchange (DSE) are required to ensure that at least 25 percent of their share capital is in public hands, this is mainly to ensure there is enough “free float” of shares which are capable of being traded actively on the market. It is also a requirement that a company applying for listing into the Main Investment Market should have a track record of at least three years of operability, among which two years should be of profitability.

In recognition that there is need for equity capital by new, young, small and medium-sized companies which are unable to afford the costs of listing into the Main Investment Market (MIM), in 2013 DSE established the Enterprise Growth Market (EGM) which has less stringent listing rules and regulations for joining or remaining listed into the stock market. The driving philosophy behind the EGM is to offer young and developing companies an access to public money, while providing investors with the opportunity to buy and sell shares in a trading environment which is run and regulated by the DSE. Efforts are made to keep the costs down and make the rules for listing into the EGM as simple as possible, without unnecessarily compromising good corporate governance and controls within these listed companies. Therefore, in contrast to the Main Investment Market segment, there is no requirements for EGM companies to have been in business for a minimum of three-years period or a profitability track-record. Furthermore, the free float required for EGM companies is only 20 per cent for a minimum shareholders of 100 compared to a 1,000 shareholders in the main Investment Market. In the end, whether the listing is in the MIM or the EGM, what is necessary is that investors have some degree of reassurance about the quality of companies coming to the market and stays listed in the market and also a possibility for an efficient exit by selling their shares whenever they want.

Companies listed in the EGM are required to appoint and retain the services of a Nominated Adviser, a company whose role is to advise the EGM company on matters of good corporate governance, reporting requirements, controls and continuos listing requirements. Nominated Advisers are required to demonstrate to the Regulator and the Exchange that they have sufficient experience and qualifications to act as a “quality controller’, confirming to the DSE that the company they advise complies with the set rules and regulations as set by the Regulator and the market.

As indicated above, the process of listing into the exchange, starts with the company organising a team of advisers to lead and advise the company in all the processes. The team of advisers would normally comprise: the Lead Adviser, the Sponsoring Broker, a Underwriter (hasn’t been the case for our market), Legal Adviser, the Reporting Accountant and the Share Registrars. These will work together to prepare a Prospectus — which is an IPO selling document to potential shareholders/investors. In the coming article I will discuss the role of each of these advisers.