The Dar es Salaam Stock Exchange (DSE) has not had the Initial Public Offering (IPO) for quite some time. The DSE continue to have only 28 listed companies, six of which being companies cross-listed from other stock exchange, they are not domestic and did not raise capital in the local market prior to their listings. These were listed by introduction. And so, the question is: why do we have so few companies that have done IPOs and listed in the stock exchange? Why is it that the stock market has such a small percentage of companies? i.e., despite the fact that the DSE established the Enterprise Growth Market – EGM about six years to enable start-ups and small and medium enterprises (SMEs) to access capital from public markets for their growth and expansion. The EGM segment so far has six (6) listed entities.
Some of the entrepreneurs and business managers that we sometimes engage with indicates that the process of completing an IPO and listing into the stock exchange is tough, too long, expensive and complex. Most of them tend to cement their arguments by indicating that the sheer fact that the process involves many disciplines of accounting and financial reporting standards, capital markets and securities law, tax laws, etc means a small enterprise will struggle. They say the average entrepreneurs usually does not have expertise in all these areas. My advice has been — but you do not need to have all these competences and experiences to prepare and take your company public. The capital market regulator and the stock exchange has trained and licensed various categories of advisers and members for the purpose. Then comes another question– who is going to pay for these services? My response is — the entity raising capital will pay, however, most of these costs are not paid up-front, they get paid from the IPO proceed on success basis.
Therefore, it boils down not to the technical expertise or costs related to raising capital through IPO – rather the fundamental issue is there is no strong motive for raising capital by way of IPO. I also understand issues around transparency, disclosure requirements, family-owned businesses (and the emotions attached into it), tax liabilities, etc are some of the issues that run on top of entrepreneur’s mind as they contemplate the issue of going public. It however should be known that there are several benefits of considering raising sustainable capital by way of IPO vs the negative side – some of these benefits are: access to fairly priced long term source of capital, the potential for future capital raising from a diverse and wider investor base, a flexible capital repayments, the glamour and prestige and profiling of the company and its products, the positive sentiment to the company by its stakeholders – customers, suppliers, bankers, the government, etc.
And so, there are many sound reasons for going public. For instance, equity capital obtained from IPO is considered a permanent form of capital since there is no interest paid on equity, and this form of capital is not repayable like it is the case for debt financing. Therefore, from an entrepreneur point of view – funds generated by a public offering are considered to be relatively ‘safe’ form of capital for a business. It removes the entrepreneur from the pressure of periodical cash commitments, etc. This means capital obtained by way of IPO allows a company the freedom and flexibility to deploy and spend capital as it needs to finance growth and expansion of the company, while sitting on strong financial/capital base.
There are several cases where enterprises growth and development seems to be hindered by lack of capital, in some cases banks requires businesses to inject more equity capital into the business before they can provide more debt/loans. So, in a case where the business needs such capital in order to expand – it becomes a chicken and egg equation. In such cases, listed companies have advantages over unlisted companies – why? First of all, the company can utilize its investor base to obtain new equity capital (via rights shares issuance); second, if a bank needs more equity capital injection by the business as a condition for the bank to provide lending facilities to the company – such equity capital can efficiently be obtained via issuance of new shares to existing shareholders (rights shares issuance) whose base is wide and broad. This way the company have access to the capability to exploit opportunities while they are present – before the competitors (who are unlisted) can seize them.
Then there are many fiscal incentives that are provided to listed companies and its investors. There are tax incentives on corporate tax, withholding tax on dividends, no capital gain on transactions related to free float shares, no stamp duties, etc.
Having said the above, it is also true that in deciding whether going public is the right strategy for financing the company (or not), there are several issues to consider – i.e., there may be many legal considerations, etc. One among them is the consideration to convert the company from a private company to a public company in order to allow free transferability of shares. But, apart from legal concerned, probably the most important consideration is that the company should have an appeal to potential investors – this means that products and services produced by the company must be in relatively significant demand by consumers, customers and users. This way your company’s shares will have high demand from investors as it will indicate that there are potentials from upside growth, which will translate into good returns for investors.
The other important fact that cannot be easily ignored is that your company will have to undergo some fundamental changes is preparation for going public. Matters of good corporate governance, the psychological change that is needed by both owners and employees — knowing that company’s management and directors shall henceforth have to answer questions from a diverse base of investors, some of them are sophisticated and pro-active; knowing that the company will be put under a microscope by investors, customers, competitors, the media, etc.