Concord Times (Freetown)
Dr. M .Jalloh
15 December 2008
analysis
Understanding the operations of the Capital Market is fundamental to a Country's development. From an empirical perspective, King and Levine (1993a) show that the level of a country's financial intermediation is a good predictor of its long run rates of economic growth, capital accumulation and productivity improvement. By spurring the savings rate and increasing the availability of loanable funds for investment, facilitating and encouraging the inflows of foreign capital, optimizing the allocation of capital between competing uses, financial sector development can boost long run growth. An efficiently functioning domestic financial market can better position a country's competitiveness in the markets for global capital.
With a view to accelerate private sector development, the Sierra Leone Stock Exchange is being set up to meet the increasing financial needs to stimulate economic growth in Sierra Leone. The much needed growth for this country can, however, be achievable if the general public understands the mechanics of the Capital Market which offers an opportunity for long-term development. In that regard, Dr. Mohamed Jalloh is currently devoting some of his time to educate the general public on some critical issues that pertain to the operations of the Capital Market. In this article, the author will provide answers on some of your concerns on how a Company's securities can be listed on the Sierra Leone Stock Exchange.
WHAT DO WE ACTUALLY MEAN WHEN WE SAY A COMPANY IS LISTED ON THE STOCK EXCHANGE?
A company's securities cannot be traded on the floor of the Stock Exchange if that company is not listed on the Exchange. So, in order for a company's securities to be legally traded on the floor of a Stock Exchange, it must first list those securities on the Exchange through tendering an application for listing.
In short, listing is the process by which a Company obtains the right/mandate to trade its securities on the floor of the Stock Exchange. A company that is granted the right to trade its securities on the floor of the Exchange is referred to as a Listed Company of the Stock Exchange. Before a company can issue securities for trading on the floor of the Stock Exchange, it must first be listed on the Sierra Leone Stock Exchange (SLSE) by applying for listing. Once the company is being listed, it is being granted the right to issue securities in order to mobilize long-term capital for investment purposes.
In order to get you're newly issued shares listed on the Sierra Leone Stock Exchange, the company applying for listing must appoint a Licensed Dealing Member of the Sierra Leone Stock Exchange to sponsor its application and ensure that the company's prospectus satisfies the Exchange listing requirements before the public floatation. However, before a private company can be listed on the Sierra Leone Stock Exchange, it must be ready to go public. The decision as to whether a company should go public is one of the most far-reaching decisions that owners of private companies can make. Whilst there is a wide range of benefits that private companies and their shareholders can obtain from going public, there are also certain obligations, particularly with regard to disclosure of information.
WHAT DO WE MEAN BY GOING PUBLIC?
A company is said to go public (or make a public offering of securities) if it decides to raise its funds from the general public by issuing financial securities such as equities (ordinary or preference shares) and debt instruments ( i.e. corporate bonds). Thus, a company that goes public is collectively owned by a set of investors called shareholders. For a company to have its shares or stocks listed on the SLSE, it must first be registered as a public limited liability company under the Companies Act Cap 249 or a unit trust or mutual fund or other public corporate body recognized under any law of Sierra Leone.
Briefly, a public limited company may be defined as a company which: (i) is registered with shares; (ii) has no restriction on the transferability of its shares; (iii) has no limitation on the number of shareholders and/or debenture holders; (iv) can make invitation to the public to acquire any of its shares or debentures; and (v) can make invitations to the public to deposit either interest bearing or non-interest- bearing money for fixed periods or payable at call.
HOW CAN A COMPANY BENEFIT FROM GOING PUBLIC?
With the operationalization of a viable Stock Exchange in Sierra Leone, going public eases the financial constraints private companies normally face in raising long-term investment capital by simply issuing financial securities to the public. Thus, the decision to go public provides the company access to numerous individuals, who in aggregate have significant amount of funds to invest. This ability to raise funds from the investing public through the issuing of securities is perhaps the most valuable of all the benefits accruable to public companies. As such, the overall financial position of the company will improve significantly as a result of the ease of accessibility to a larger pool of investment funds. The injection of substantial equity funds, for example, greatly improves the company's balance sheet. With such capital reinforcement and good management, higher earnings and dividends are almost certain to follow.
Secondly, going public means that the company will be subjected to regular disclosure of vital information regarding its operations to the general public. This involves regular publications of the company's financial statements, balance sheets, income statements and periodic/ annual reports. This will raise the level of the investing community's awareness of the company's activities and products. In this regard, public companies have greater potentials to attract high calibre employees and increased general business opportunities. Public companies also benefit from access to the useful information brought to them by their advisers, financial analyst, stockbrokers and shareholders.
Thirdly, going public spreads out the ownership of a company by allowing many individuals to have stake in it through the purchase of its shares. As the ownership of a company gets broader, existing shareholders are place in a position to diversify their interest and therefore invest in other assets elsewhere. Thus, investors who place their money in public companies stand the likelihood of being able to diversify portfolio investment, thereby mitigating investors' risk by not putting all their eggs in one basket. A key advantage of going public is that of enabling companies to offer share options and employee share ownership schemes which benefits both existing employees and those to be recruited. The investing public and the existing shareholders also derive some benefits when private companies go public.
Fourthly, the fact that shares of private companies are restricted in terms of transferability implies that the market value of these shares cannot be easily determined by the market forces of demand and supply. Thus the price mechanism has little or no role to play in determining the share value of private companies. A key benefit that shareholders in private companies derive from going public is the ability to establish a market value of the shares, thereby enhancing tradability. Public companies thus offer the investing public, including institutional investors and pension funds, an attractive avenue for investment by virtue of the liquidity of the securities. With a well operationalized Stock Exchange, the liquidity risk to which investors in public companies are exposed is minimized by making financial assets tradable.
HOW CAN YOUR COMPANY GO PUBLIC?
Your company can go public (or make a public offering of securities) under the provisions of the Companies Act Cap 249. In order to convert a private company into a public company, the regulations of the company will have to be altered in such a manner as to conform to the requirements of a public company as outlined in the Companies Act Cap 249. Within twenty-eight days after the date of the special resolution altering the Regulations to become a public company, the company shall deliver to the Registrar for registration: (i) A copy of the said resolution, and (ii) A prospectus complying with the provisions of the companies Act Cap 249. In order to make a public offering of securities, your company may need the services of a Stock Broking firm and other professionals to assist with the preparation and processing of a prospectus and other details of the floatation. Currently, there are two licensed brokerage firms known as "Dealing' members First
Discount House Limited (FDHL) and Capital Discount House (CDH). Other licensed brokerage firms may be established indue course.
WHY MUST YOUR COMPANY BE LISTED ON THE EXHANGE?
Owners of companies/businesses always want to see their operations grow as the demand for their products/services increase. Sometimes, it may be very difficult to raise additional finances to support expansions in the company's operations. Bank loans may be very expensive, short-term and limited in amount available. With the Stock Exchange, a company can raise a huge amount of long-term capital by issuing financial securities tradable at the floor of the Exchange. However, any company that wants its securities to be traded on the floor of the SLSE must be listed on the Exchange. A lot of benefits can be derived from being a listed company on the Sierra Leone Stock Exchange.
The following benefits can be enjoyed by your company if listed on the Sierra Leone Stock Exchange: (i) once a company is listed on the Sierra Leone Stock Exchange, additional financing is easier to raise through subsequent issuing of securities. (ii) The credibility of both investors and potential creditors can be enhanced because of the high standards that must be met and maintained by listed companies. (iii) There is increased visibility of the company through the comprehensive disclosure of information on the public and publishing of trading statistics by SLSE.(iv)The Exchange creates a market place where the securities of all listed companies can be bought and sold. This in turn increases the demand for securities and adds to the value and acceptance of the securities because the purchaser knows that there is a ready market for shares.
For the investor, the Stock Exchange provides the following an opportunity to invest in a company and participate in its prosperity, even though the investor may only have limited funds available. A reasonable level of assurance of reasonable management because of the high standards that must be met and maintained by listed companies; and a better trading liquidity due to a larger market base.
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