12 October 2017

Uganda Securities Exchange Finally Converts Into a Limited Company

The Uganda Securities Exchange (USE) finally demutualised a week ago, after 10 years of waiting.

The development offers profit sharing for the bourse's shareholders, wider ability to mobilise capital and fewer risks of conflict of interest among stockbrokers.

Demutualisation is the transformation of a stock exchange from a company limited by guarantee to a public company limited by shares -- a legal change that allows its shareholders to share profits earned from the stock exchange's operations, creates room for public ownership and self-listing, and separates ownership from management.

"Within three years, we expect our members to sell some of their shares down to 10 per cent, and this will help raise new capital for the USE through floating those shares on the trading floor. Through the demutualisation process, about Ush420 million ($115,178) will be raised from our members, and this will be invested in new infrastructure that is needed for rollout of new products like data vending.

"The major benefits of demutualisation lie in the increased ability to innovate. For example, the Nairobi Securities Exchange has been able to roll out derivatives trading and develop cutting edge debt products like the m-Akiba bond," said USE chief executive Paul Bwiso.

The USE was incorporated as a company limited by shares on May 18 this year.

The demutualisation began in 2007, but was slowed down by delays in changing to capital markets laws to endorse demutualisation and disputes over allocation of shares among stockbrokers.

Under the amended Capital Markets Authority Act of 2016 and amended Establishment of Stock Exchange Regulations of 2016, the USE was required to demutualise by May 20, 2018, and is obliged to maintain authorised share capital of Ush1 billion ($274,234), equivalent to 100 million shares with a nominal value of Ush10 ($0.0027) per share.

The USE's issued share capital is Ush42 million ($11,518), equivalent to 42 million shares. Existing stockbrokers are entitled to 6 million shares.

Current stockbrokerage firms include the African Alliance Uganda Ltd, Baroda Capital Ltd, Crane Financial Services Ltd, Crested Capital Ltd, Dyer and Blair Uganda Ltd, Equity Stockbrokers Ltd and UAP Financial Services Ltd.

While a demutualised securities exchange enables shareholders to distribute profits among themselves, expanded opportunities for raising new capital could minimise financing challenges.

Cushion against financial shocks

Under the previous legal status, the USE's profits were transferred to its reserves to cushion it against sudden financial shocks caused by extreme declines in trading revenues.

The shocks were occasionally experienced during periods of market gloom -- a practice that shielded the exchange from financial collapse but denied its members a share of its earnings.

The USE recorded profit before tax of Ush1.7 billion ($466,197) in 2014, and Ush300 million ($82,270) and Ush266 million ($72,946) in 2015 and 2016 respectively.

Increased opportunities for capital mobilisation are expected to boost future investment initiatives by the exchange in derivatives and Exchange Traded Funds (ETFs) trading and data vending systems, among other areas.

Whereas the USE's current organisational structure gives stockbrokers dominance on its governing council, an equivalent of a board of directors, risks of conflict of interest have reportedly increased where the exchange handles a disciplinary matter related to one of the member firms represented on the council.

Reduced stockbroker representation on the governing council is expected to minimise risks of conflict of interest among its directors.

"A demutualised exchange enjoys bigger room for corporate governance in a situation where any listed company is required to report financial performance more than once a year, and this works positively for the general public when it comes to making and evaluating investment decisions," said Robert Baldwin, CEO of Crested Capital.

Retail investors are upbeat about the demutualisation.

"The demutualisation of the USE will improve its corporate governance standards by exposing it to strong public scrutiny instead of restricting it to a small business club run by a few people. Andrew Muhimbise, a retail investor. "It will attract ambitious investors willing to introduce new products on the market."

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