Obed Tindyebwa
24 March 2008
opinion
News of the Initial Public Offer (IPO) of 40% government stake in Safaricom, a leading mobile telephone operator in Kenya with a subscriber base of about eight million and the most profitable company in East Africa in 2006 have generated a lot of enthusiasm.
Stock trading in Uganda is not a common thing and it is still a preserve of a few. In the East African region, Kenya has the oldest stock exchange, Nairobi Stock Exchange (NSE) that was established in 1954 while Dar es Salaam Stock Exchange was established in 1996 and Uganda Securities Exchange (USE) in 1997. Rwanda is currently considering the establishment of a stock exchange as a satellite of the NSE.
On NSE there are 54 equities trading compared to only 9 on USE including the cross-listed 3 namely, Kenya Airways, East Africa Breweries and Jubilee Holdings. All companies listed on USE are those in which government has divested its shares through IPOs except the cross-listed companies.
The lack of a developed stock exchange in Uganda has limited investment opportunities for many small Ugandan would-be investors. Private companies in Uganda, most of them family owned, remain reluctant to list on Uganda Securities Exchange partly due to selfish interests and fear of intense scrutiny and rigorous corporate governance requirements. There is also lack of knowledge and appreciation of benefits of listing since USE is new.
It has been observed that most successful companies that would be eligible for listing do not see the need for listing.
The above notwithstanding, a listed company enjoys many benefits compared to a private limited liability company among them the enhancement of the company's brand name that gives it a 'badge of quality' in the eyes of investors, suppliers, business partners and employees. It shows the company meets best practice standards of corporate governance and provides the ideal platform for an international growth strategy.
For today's successful companies, good corporate governance is a business imperative, underpinning investors' confidence a key guiding aspect regarding their trading decisions.
Listing enables the company to access cheap capital hence it is a cost effective means of raising capital. It has been established that it costs less to access capital through the stock market than elsewhere.
A listed company can issue new shares to the public or exercise a rights issue to existing shareholders which is not possible for private companies as they cannot issue shares to the public at large. For a listed company, it is easy to attract a variety of shareholders including institutional investors and/or foreign investors. This enables the company to embark on the expansion of its activities and increase the growth potential in future.
Shares of a listed company can be priced because they can be traded in the stock exchange and have a market price as opposed to a private company whose shares cannot be easily priced and traded.
Regarding ordinary citizens, having many listed companies would offer them a chance to own a stake in profitable companies resulting into a broader base of local corporate ownership. This would ultimately improve the incomes of many Ugandans hence contributing to the achievement of the Millennium Development Goals (MDGs).
Given that private companies are reluctant to list on USE, the government needs to come up with a deliberate policy to make listing very attractive. This should be in addition to compelling the privatised companies that were supposed to list to do so. The government should put in place tax incentives to encourage private companies to list.
Kenya for instance put in place many tax incentives that have contributed to the growth of NSE. Withholding tax (WHT) on dividend income is 5% for local residents and 10% for non-residents. In Uganda WHT on dividend income from listed companies for local residents is 10%.
Capital gains tax (CGT) was suspended in 1985, while WHT on interest income from listed corporate bonds and treasury bonds is 15% whereas CGT is still applicable to companies in Uganda. A newly listed company pays corporate tax at a lower rate of 20% for a period of 5 years, provided that it offers at least 40% of its shares to the Kenyan public. The companies that successfully apply for listing get a tax amnesty on their past omitted income, if they make full disclosure and oblige to pay all their future taxes. The IPO-related costs are tax deductible.
In Uganda, listed companies pay corporate tax at 30% and there are no amnesty benefits. It is high time the government of Uganda acted to encourage listing through provision of tax incentives which would bring many long term benefits.
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