Why local businesses are not warming up to stock market

Upon its inception in 1998, the Uganda Securities Exchange (USE) set out to be Uganda’s preferred institution for investments and sourcing of capital.

Indeed, the first ten years saw a number of companies listing, the biggest of them all then being the Stanbic bank offer in 2006. Since then, however, the interest on the market has slumped, and the fortunes that once defined the securities have made it a shadow of its former self, writes AARON GAD ORENA.

Some large broker dealers such as MBEA Brokerage Services, Renaissance Capital and, most recently, African Alliance, have exited the market, complaining of a slump in trades and revenues.

Although, some of these struggles can be attributed by the reluctance of many Ugandan companies to list on the stock exchange. While getting listed on the stock exchange might come with a number of benefits, such as raising capital and mobilisation of savings, many private Ugandan companies have shied away from selling their shares to the public.

There only 17 companies listed on the Uganda Securities Exchange, compared to the more than 50 at the Nairobi Securities Exchange.

According to scholars, risks associated with the required disclosure of Initial Public Offerings (IPOs) are not adequately compensated by additional returns. This is because a listing begs the question of legitimacy of the business. Also, the requirements needed for one to get listed might soil the reputation of the company, which is a risk that local businesses are not ready to take.

Prof Samuel Sejjaaka in his 2014 study “Challenges to the Growth of capital markets in underdeveloped Economies: The case for Uganda” observed that while the requirements for listing on stock exchanges are onerous to an average business, they are necessary to maintain the integrity of the markets.

In Sejjaaka’s report, IPO readiness is determined through publication of accounts, share transferability, board control and a composite variable for IPO readiness. He views legitimacy as a concern for many businesses despite the oversubscription of the Initial Public Offers (IPOs) for the local listings.

Other than the listing of drug manufacturer Cipla in September last year, there had not been any flotations or IPOs involving private initiatives/local companies since the inception of the USE. This implies that businesses/entrepreneurs, other than public enterprises which were listed mainly for structural adjustment reasons, are not taking advantage of the USE as a vehicle for raising capital.

A lot of findings in that study that was carried out in […]

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