Capital flight fears as foreign firms urged to list on regional bourses


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East African governments are pushing for policy changes to compel multinationals to sell shares to the public on the region’s stock exchanges, a move development analysts say could lead to capital flight.

Regional stock exchanges have been struggling to attract new listings largely due to the high cost of listing fees, stringent regulations, increased disclosure requirements, malpractices such as insider trading and the flourishing private equity market.

Local businesses, particularly retail and individual investors, are currently reluctant to buy stocks of listed firms, instead opting to pursue investment options with fairly stable returns such as real estate and bonds.

Uganda is the latest East African country seeking listing of foreign companies through legislation, after Kenya and Tanzania.

David Bahati, Uganda’s Finance State Minister in charge of Planning, recently said that the government is drafting regulations to compel large foreign companies to list on the Ugandan Securities Exchange.

“We are working on regulations to request and/or compel every foreign company to float shares. The regulations will be coming soon so that we minimise capital flight,” Mr Bahati said.

Uganda already has a National Broadband Policy that requires all foreign telecommunications companies operating in the country to have local ownership.

Evelyn Anite, Uganda’s Junior Minister of Finance for Investment and Privatisation, said that the new policy, which is before the Cabinet, said the policy will address bottlenecks at different investment phases, including selling land to foreign investors.

President Yoweri Museveni recently said that “unfair” multinationals, especially telcos that make huge profits and repatriate everything, need to sell shares on the local stock exchange.

The government says that the proposed changes will ensure that some of that money remains in the country. Ugandan law allows a foreign investor to repatriate 100 per cent of their profits as long as they have paid their taxes, salaries, securities, and their shareholders.

The move to compel foreign companies to sell shares to Ugandans will start with telecom and betting companies.

Mr Bahati said that betting companies are included because of the risk of money laundering. Uganda has suspended issuance of new licences to foreign owned gaming companies or renewal of expired licences until the new guidelines are completed.

The government is in talks with MTN, the biggest telecommunication company in the country with about 10 million subscribers, to list on the local stock exchange. The company is reportedly willing to offer a 20 per cent stake to Ugandans.

The USE struggled to attract listings for six years, until August 2018, when drug-maker Cipla Quality Chemical Industries came to the market to sell an 18 per cent stake worth Ush657 million ($175,000) to the public. Prior to that, the last IPO was in 2012 for utility firm Umeme.

Keith Kalyegira, chief executive officer of the Capital Markets Authority, said that the new policy is good for the bourse.

“We would like to see an increase in the number of companies, both local and foreign,” Mr Kalyegira said.

The USE has nine local companies and eight cross listings.

In Tanzania, the government has already enforced a law that requires telcos and mining companies to float at least 25 per cent and 30 per cent of their shares respectively to the public.

But in 2017, the country’s largest mobile operator, Vodacom, failed to draw much interest from local investors when floating its shares. This led the government to remove restrictions on foreign shareholding.

Vodacom Tanzania offered 25 per cent of its shares, worth Tsh560 million ($243,000), to the public in what was billed as the country’s biggest share sale ever. Although the shares were reserved for Tanzanian investors, only 60 per cent were taken up by locals and 40 per cent had to be opened up for foreign acquisition. The telco extended the offer period by three weeks, amid concerns about liquidity in the local market.

The Rwanda Stock Exchange had only one IPO in 2017, with the listing of I&M Rwanda. The bank had to wait for five years before the government offloaded its stake.

In Kenya, attempts by the government through the Companies Act (2015) to compel foreign companies to cede 30 per cent of their shares to locals hit a dead end after an outcry by market analysts and foreign business lobbies.

Early this month, Nairobi Securities Exchange chief executive Geoffrey Odundo said the policy should be reinstated to force successful companies to list on the exchange, which has failed to attract new listings for the past 10 years.

Kenya insists that foreign telcos relinquish a 20 per cent stake to Kenyans within three years of receiving a licence.

The new Mining Act (2016) restricts foreign participation in the sector by reserving the acquisition of mineral rights to companies with 60 per cent Kenyan ownership of mineral dealerships and artisanal mining companies.

In addition, the Private Security Regulations Act (2016) restricts foreign participation in the private security sector by requiring that at least 25 per cent of shares in private security firms be held by Kenyans.

The government has also established regulations stipulating that Kenyans own at least 15 per cent of the share capital of derivatives exchanges, through which options and futures can be traded. The derivatives market is expected to go live next month.

Some companies are now shifting their focus to private equity and placements to raise capital outside the stock market.