This article was written by Dr. Alan C. S. Shonubi and was published in the Chambers Global Lawyers for Africa Edition - 2009 issue.
Introduction
It is said that there is security in numbers. If this age old adage is true, then the nascent and seemingly over-regulated capital markets of the financial world, like Uganda's, are highly vulnerable, with insufficient capital pools to guarantee sustainable growth. That same adage however, contradicts the current minimally regulated Anglo-American market trends, where vast players ranging from elephants to individuals, have not protected the markets from the unprecedented downturn seen this October 2008. What is the Regulator's middle ground between these two extremes?
The current policy of the Capital Market Authority (CMA), the capital markets regulator in Uganda, is to protect and develop what it views as a delicate market. Interestingly, the CMA allows the Stock Exchange 1 to set up its own rules to govern the actual trading on the market. To this extent, perchance the CMA should be lauded for not directly involving itself in closely regulating the players on the market.
The trouble however is that the USE, being the sole exchange, can afford to be quite stringent in its qualifications as there is little fear that the Companies will opt to list on another Exchange. The USE has three market segments on which a company can list - the Main Investment Market Segment (MIMS), the Alternative Investments Market Segment (AIMS) and the Fixed Income Securities Segment (FISS), Listing on the MIMS and FISS for instance, requires one to publish audited financial statement complying with International Accounting Standards. Many Companies find themselves reluctant to publish their financial accounts, much less to issue the prospectus which is just one of many listing requirements. Thus the apparent laissez-faire approach of the CMA would appear ephemera, for what the CMA does not do itself; the Uganda Securities Exchange (USE) does on its behalf.
The market thus remains dominated by the few companies that are impervious to the several disclosure and capital/profit history requirement that the USE requires as a pre-cursor to listing. yet, requiring anything less than utmost disclosure would be to visit unforeseen risks upon potential investors. Stringent disclosure requirements guarantee good Corporate Governance - an impetus to investor confidence in the capital markets industry. What possible intervention then, can lend Uganda's nascent market the numbers it so desperately needs?
Re-focusing targets: Courting institutional investors
Institutional investors are the darling of capital markets the world over and Uganda should be no exception to this trend. It is generally accepted, that seasoned investors will buy what the big money is buying. The CMA and the Uganda Investment Authority must develop a policy aimed at encouraging institutional investors to divert their resources to our market now, when their confidence in the Anglo-American markets is shaken.
Rather than call for minimalist regulation, Uganda has to re-strategise its marketing to attract domestic and foreign Institutional investors whose volume of capital has a direct correlation to the liquidity, stability and growth of the securities market.
The Anglo-American experience suggests that the Institutional investors can greatly spur capital markets development. Vitas, reviewing the Anglo-American experience, shows that institutional investors can help to stimulate financial innovation, modernise capital markets, enhance transparency, strengthen corporate governance, and improve financial regulation.
Most importantly, Institutional investors also have the capacity to encourage globalisation of financial markets, adequate legal protection, observation of international standards of accounting and financial reporting; three factors which jointly ensure good corporate governance.
Uganda's seemingly stringent regulation in this regard is thus placed to increase investor confidence in our budding securities market.
Conclusion
Critics will say that the Anglo-American markets leave a lot to be desired, using their recent misfortunes as proof that burgeoning markets cannot learn much from them. The answer to their argument lies in an African proverb - never throw our the baby with the bath water.
While minimal regulation of the Anglo-American markets encouraged participation of both institutional and individual investors and resulted in growth, history has shown that this much-acclaimed growth might perhaps have been sustained by the presence of more stringent regulation. Relaxing our regulation will probably result in a momentary rise quickly followed by an inevitable decline-a-bubble, it is therefore not a viable strategy. Increasing the volume of players on the market though is.
How can Uganda protect and still develop its securities market? Which must come first - development or protection? Virtue is in the middle - the CMA may need to strike a delicate balance between maintaining regulations not prohibitive towards entry of new players while keeping a watchful eye to ensure that investors are not abused by listed companies ignoring practices of good corporate. Encouraging increased entry of institutional investors is perhaps a critical strategy that could determine the next boost in Uganda's securities market.
