USE undergoes demutualisation

What being an exchange PLC entails?

On 31st August 2017, the Uganda Securities Exchange announced that it had received a formal approval from the Capital Markets Authority to operate as a demutualised entity stock exchange in accordance of the Capital Markets (Amendment) Act 2016 and the Capital Markets (Establishment of Stock Exchange) (Amendment) Regulations 2016.

Demutualisation is a process of transforming a mutual/co-operative association into a public company by converting the interests of the members into shareholdings that can be traded like the shares of the company. Investors can now trade USE shares as we speak. It is now a public company limited by shares.

USE is a member of the African Stock Exchanges Association and remasins the principal stock exchange of Uganda irrespective of this transformation. It operates under the dominion of Uganda’s Capital markets Authority. The CMA reports to Bank of Uganda.

Their flagship stock index is the Uganda All Share Index which was launched in 2003. As of the week 18th-22nd September 2017, the ALSI index session closed at 375.29 up by 0.43 basis points from the previous week with its most active counters being Umeme limited and SBU. The turnover during the same period stood at 130,889,789 less than that in the previous week of 374,384,273.

The exchange has grown and is currently trading 16 listed local and East Africa companies. It operates in close association with the Dares Salaam Stock Exchange of Tanzania, the Rwandan Stock Exchange in Rwanda and the Nairobi Stock Exchange of Kenya.  Rumour has it that in the not so distant future we shall see a merger of the three which will result in formation of a single East African bourse. But that remains a rumour.

The exchange was founded in June 1997 but started trading in January the following year. At first only the East African Development bank had issued a Ugx. 10 billion 4-year bond and was the only listing. There was limited trading per week. But this did not stop it from expanding.

This was followed by a host of milestones. On 27th March, 2001, the first ever cross border listing in the East African market occurred where East African Breweries Limited (EABL) was listed on the Uganda capital markets. This followed the listing of the first financial institution on the Uganda Capital Market, Bank of Baroda Ltd. Jubilee Holdings limited became the first insurance institution to list on the UCM in 2006. In July, 2015, USE automated its trading platform where the CSD systems were integrated with the Automated Trading System eliminating the manual process of data capture. And at the beginning of 2017, it launched an e-platform dubbed Easy Portal in a bid to ease access for investors to track their portfolio and buy shares online during public offerings beating Kenya to become the first in the region to roll out the portal.

Yet efforts to demutualise the exchange have been underway since 2007, it has taken them more than 10 years to finally get approval. Yes, demutualisation is yet another milestone in the advancement of this entity. But what does it mean for USE to be demutualised? Is it economically feasible? SB gives you an in-depth insight on this issue at hand.

Connotation of USE being a PLC

Of course, USE will not only be able to conduct commercial business to make a profit just like a normal corporate entity, but also put in place a board of directors to look after its day to day operations. Previously, investors were reluctant to invest their proceeds with USE. Most of them were uncertain of where the funds would go, others had doubts about the management. Many investors believed that the exchange was subject to manipulation especially when it is run by a governing council. This was drifting the exchange away from its vision of being Uganda’s preferred institution for investments and sourcing of capital. Demutualisation will give control of USE to even investors that don’t have trading rights. So everyone will be able to take part.

To meet its mission to create an efficient and secure East African market place that will enhance the competitive strength of the local capital market in Uganda, there will also be an independent, transparent and flexible governance structure. Once an exchange is listed as a PLC, it’s governed by the normal corporate governance standards and ethics to ensure more transparency. It’s set to induce investors to trade more freely which will most definitely boost USE’s turnover which stood at Ugx. 130,889,789 as reported at the end of September 2017. The exchange will further attract investment from other sources; hedge funds, mutual funds and other institutional traders.

USE also plans to self-list through an Initial Public Offer in the next couple of years. This will enable Ugandan investors to buy stake in the exchange. Take for instance, demutualisation in India where their existing members stake was reduced to 49% and the rest was put up for trading. With more stake listed, USE will be able to raise more revenue. As per today, reported by USE C.E.O, Mr. Paul Bwiso, the initial shareholders are African Alliance Uganda Ltd, Baroda Capital Ltd, Crane Financial Serviced Ltd, Crested Capital Dyer and Blair Uganda Ltd, Equity Stock Brockers Ltd and UAP financial services Ltd.

But are these targets feasible in Uganda’s problematic economy?

All is well on paper doesn’t necessarily mean it ends well in practice

Going public entails many things and one of them is inducing an exit strategy. This gives options to founders and existing stakeholders to exit the business at some point in the not so distant future. The likes of Charles Mbiire, Birbal S. Dhaka, Francis Kajura, to mention but a few could be using this process to exit the business. And with a pending board of directors, we could see a change in management approach which could have adverse effects on the persistently growing exchange. Handing over stake to the public might breed detrimental board decisions like those Umeme limited is currently undergoing that have seen it hit an all-time low half year loss of Ugx. 47 billion.

SB understands the effort USE is taking to make its business transparent. But this does not come cheap. Being transparent involves appointment of supplementary staff viz fraud experts, at least two directors, suitably qualified company secretary, producing higher transparency accounts in less time than had previously been produced, the list is endless. Some of these USE already has but the processes will most likely consume more time and effort which would be previously used to grow the business. Time is money!

This demutualisation is set to increase public scrutiny of the exchange by analysts and receive more media observation. USE now has to disclose more detailed data about the business and performance irrespective of its influence on investors’ decisions. Of course a positive report could boost investor numbers but we shouldn’t overlook unanticipated pitfalls. When Umeme limited was flourishing, there was negligible scrutiny but in these hard times, the whole public is questioning their management. Every tabloid from Newvision, the Daily Monitor, Weekly Observer to Summit Business magazine, has a story on their worrying figures. Previously, USE could disclose limited data for public scrutiny but as per this development, they should avoid any minor lapses which could alarm the public adversely affecting its business.

Previously, USE’s governing council could investigate and monitor interested stakeholders before giving them the privilege to buy its stake. The initial shareholders are visible evidence. With the PLC, it’s going to become harder for them to make decisions on pending stakeholders. There is a possibility that the governing council chaired by Charles Mbiire could receive drastic uncalled for changes in which the existing stakeholders could lose control of the direction of the exchange, face disputes or even spend more time managing shareholder expectations while the exchange lags behind. To make matters worse, institutional stakeholders expect consultation and adoption of their policies (self-centred most times) in return for their investments. If for instance USE takes a drastic investment in different products that could be of long term benefit to the exchange like ATS, stakeholders might look at the short term losses in making their decisions which could further hinder the exchange. Is this the path USE is following?

With limited monitoring from the governing council and more power to a board of directors, USE is at threat of experiencing a “dirty” takeover. We call it dirty because of what the investor has done behind the radar in building their share base. Large shareholders could take advantage of small shareholders to build their stake in the company consequently taking it over. For instance, alias Kebba could take advantage of three small shareholders, buy their shares underground with limited monitoring and build enough stake to take over USE as the highest shareholder. With this influence, the company in question could use this advantage to manipulate USE’s share price in their favour. Such bid attempts have led to the downfall of many a company take Crane Bank limited for example where there was fraudulent acquisition of shares. We hope USE doesn’t follow into these footsteps.

A previously long run focused business model that USE had adopted, installing Easy Portals and ATS, could change in the not so distant future. Added pressure imposed on the stock market with USE’s share price representing the value of the exchange, stakeholders will always hope for a healthy return. Not only will the investors want satisfactory dividends from profits, they’ll also expect a subsequent share price increment. A focus on share price results into an impromptu change in business strategy. Instead of long term benefiting developments, top management will instead focus on short term goals to meet investor expectations. Instead of holding out for new innovations and investing heavily in these to sustain USE’s growing brand, management will be more interested in making short term profits and reducing on costs. This will most definitely be detrimental to Uganda’s capital markets if the issue is not mitigated early. This is what analysts term as short-termism.

In an economy where big PLCs are struggling to counter their operation costs, reporting losses in their performance reports, undergoing highly volatile share price situations and massively criticised for expansion in their confines relative to the dividend for investors, USE is in for enigma. The choice is yours, you could ignore what other PLCs have undergone or prepare to mitigate them.

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