Introduction

About the SEM

The Stock Exchange of Mauritius is the principal stock exchange of the island country of Mauritius. The

market is located in Port Louis and was founded in 1988. The name of the exchange is abbreviated to

"SEM".

The SEM's "Official Market" has three market indices: SEMDEX, SEMTRI and SEM-7. The SEM's

"Development and Enterprise Market" has two indices: DEMEX and DEMTRI.

History

The Stock Exchange Act 1988 established a small but thriving exchange which is run by the Stock

Exchange of Mauritius Ltd (SEM), a private limited company. The Act also established the Stock

Exchange Commission (SEC), which controls and supervises stock exchange operations. There were

two markets operating on the stock exchange, namely the Official List and the Over-The-Counter

Market (for unlisted shares). There are around 40 companies listed on the Official List, and around

eighty companies quoted in the Over-The-Counter Market. 10 companies are quoted for their

debentures. The Stock Exchange has classified these companies into 7 categories - namely Banks and

Insurance, Industry, Investments, Sugar, Commerce, Leisure & Hotels and Transport. There are also 2

dual listed funds quoted both on the London Stock Exchange and the Stock Exchange of Mauritius.

The SEMDEX - the all shares index - reflects capitalisation based on each listed stock which is weighted

according to its shares in the total market. In its computation, the current value of SEMDEX is

expressed in relation to a base period, which was chosen as of July 5 1989, with an index value of 100.

Trading takes place five days a week and is conducted through an open outcry, order-driven and single-

price auction system. Each share (excluding foreign shares) has a maximum +/- 15% price limit per

trading session. A 1% brokerage commission is charged by stockbroking companies. There is no tax on

dividends or capital gains.

Major developments have been realized through the establishment of a new electronic clearing and

settlement system and the introduction of daily trading (at the end of 1997). Future planned

developments include the introduction of a new electronic trading system and the listing of new

financial products on the stock market. The Stock Exchange of Mauritius was recently promoted from

the status of corresponding exchange to that of affiliated securities markets within the Fedération

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Internationale des Bourses de Valeurs (FIBV) and is also a founding member of the African Stock

Exchange Association (ASEA).

The SEM was opened to foreign investors in 1994 following the abolition of exchange controls. Foreign

investors do not need approval to trade shares, unless the investment is for the purpose of legal or

management control of a Mauritian company. The only restriction is that foreign investors cannot have

individual holding of more than 15% in a sugar company. There is no control on currency repatriation,

and the currencies are fully convertible and market determined. Settlement can be made in foreign

currency and foreign currency accounts can be opened in Mauritius. There are no capital gains taxes and

no withholding tax on dividends procured from trading in officially listed companies.

A major development of 1998 has been the implementation of a Central Depository System, in which all

listed companies are registered. This system allows delivery versus payment (DVP) on a T+3 day

rotating basis. The establishment of a clearinghouse, through the Bank of Mauritius, provides for a

guarantee fund, which incorporates measures for securities and fund settlement failure. The Stock

Exchange in collaboration with international advisers has drafted new listing and reporting rules to

ensure greater transparency for investors. These rules are due to be released during the first half of 1998.

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Listing Requirements of Official and DEM Market

Listing Requirements on the Equities Market.

Introduction.

Companies seeking to be listed on the DEM and Official Market should abide by the listing rules

established by the Stock Exchange of Mauritius Ltd. The latter is also the authority responsible for

listing the securities on the appropriate market, under the supervision of the FSC. The listing rules

govern the admission, obligation and suspension and withdrawal of the securities for each market.

Listing Requirements for the Official Market.

In order to be listed on the Official List of the SEM, the company should show appropriate trading

record with published or filed accounts for 3 years preceding the application. Expected market

capitalisation should exceed Rs 20 million and at least 25% of the total shares should be issued to the

public, with a minimum of 200 shareholders. Moreover, other documentations and information should

be provided so as to enable investors to be reasonably well informed about the securities quoted and the

issuer. Those requirements are as follows:

The assets and liabilities of the issuer The financial position of the issuer The stated capital of the issuer The profits and losses of the issuer The directorship of the issuer The rights attaching to the securities The prospects of the issuer

Listing Requirements for the DEM.

Companies, before being listed on the DEM, should have a minimum market capitalization of Rs 20

million. At least 10% of their shareholdings are in public hands and bearing more than 100 shareholders.

Moreover, they should present their published financial statements for at least 1 year, prepared in

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accordance with IFRS and audited in accordance with ISA without qualification. However, the SEM

may grant admission to a company having less than 10 % of shareholding in public hands or having less

than 100 shareholders provided that the company undertakes to increase its shareholding in public hands

to 10 % and its number of shareholders to 100 not later than the end of the first year of admission,

failing which the company may be struck off from the DEM.  Admission may also be granted to a

company if it has no proven track record provided that the company submits to the SEM a sound

business plan covering at least 3 years and certified by an independent financial adviser, demonstrating

sustained viability of the company and disclosing risk factors.

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Regulation

Supervision of Market Participants

How are market participants regulated?

In addition to monitoring the trading activities of Market Participants, SEM also conducts on-site

inspections of Market Participants to ensure their compliance with the rules and requirements of the

exchange. The SEM may inspect the books, records and accounts of Market Participants and to take

such action as it deems appropriate after such inspections.

Where it appears that a Market Participant may have failed to comply with any of the provisions of the

law or the Rules of the Exchange, the Compliance Department of the SEM shall immediately notify the

Market Participant concerned of such failure and request an explanation. Depending on the seriousness

of the breach, SEM may require the Participant to take remedial action within a specified delay or take

such disciplinary action as permitted under the rules.

SEM also monitors on an on-going basis the financial health of Market Participants to ensure that they

have adequate capital for their operations. Participants must file financial reports with the SEM

periodically. In addition, they are also required to lodge with the SEM, their annual audited accounts.

Enforcement

Market Participants

Section 13(2)(d) of the Securities Act 2005 provides that a securities exchange may make rules, not

inconsistent with the Act, any regulations made under the Act or any FSC Rules, with regard to

enforcement and disciplinary procedures and sanctions to be applied.

Where the SEM suspects a breach of the rules of the Exchange by a Market Participant or any of its

directors, employees or ATS Operators, SEM shall enquire into the alleged misconduct. The breaching

party may be requested to take appropriate remedial action or disciplinary action may be initiated

depending on the seriousness of the breach. The matter will also be reported by SEM to the FSC.

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The Stock Exchange of Mauritius (SEM) is supervised and regulated by the Financial Services

Commission (FSC) under the Securities Act 2005 (which replaces the Stock Exchange Act 1988).

The Securities Act 2005 has come into force on September 28, 2007 by proclamation. The new Act

seeks to enhance and upgrade the existing securities legislation in Mauritius by providing a wider and

deeper coverage of the securities market and is based on standards recommended by the International

Organisation of Securities Commissions (IOSCO).

The main object of the Securities Act 2005 is to ensure a fair, efficient and transparent securities market

and most importantly, to strike an appropriate balance between the protection of investors and the

interest of the securities market. It establishes a framework for adequate regulation of securities market,

market participants, self-regulatory organisations and for the offering and trading of securities. The

Securities Act 2005 draws on modern legislation in other jurisdictions and is based on up-to-date

regulatory and supervisory standards. To give effect to the provisions of the main Act, a number of

regulations are currently being developed by the market regulator, which will be adopted in the near

future.

The SEM has statutory authority to adopt rules governing the conduct of its members and listed

companies and to enforce these regulations. All the rules and regulations of the SEM are subject to prior

approval by the FSC.

The SEM is expected to review the present legislation so as to reflect the standards observable in

sophisticated stock market and to ensure that the new legislation be in line with the harmonisation

process which is underway in the Southern African Development Community (SADC). It is expected

that the harmonisation of the Listing Rules in the SADC region will pave the way to cross-listing and

cross-border activities.

In this context, a reform of the listing function of the SEM has recently taken place, whereby the Stock

Exchange assumes responsibilities for front-line regulation of the listing function of the Exchange's

activities and new listing rules.

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Major Developments on SEM

Automated Trading System of Stock Exchange of Mauritius

Automated trading system of stock exchange of Mauritius ensures improvement in various spheres of the stock market. Earlier, the stock exchange 's activities were limited to the Official market as well as the Over-the-counter market. With the advent of the SEMATS, the official market has included other activities as well. 

It is a well-known fact that the way of trading has changed the world over in the last couple of years. More so, because there are several countries who have removed restrictions on trade. Owing to this stock exchanges in different parts of the world are trying to improve the operating potentialities of their trading exchanges. The Automated stock exchanges being updated the world over is a measure for the same. 

SEM or Stock Exchange of Mauritius in the year 1997 founded a Central Depository and Settlement System also known as CDS. This was done to ensure that transactions pertaining to the stock exchanges may be settled as well as cleared as per the norms of the G-30 Standards. 

SEMATS or Stock Exchange of Mauritius Automated Trading System has been designed to cater to the needs of equity driven and the debt markets. 

Prior to the implementation of the Automated trading system of stock exchange of Mauritius, the exchange operated in two different kinds of markets. They include:

OTC or the Over-the-Counter Market Official Market 

After the implementation of the automated system, the following areas would also be attended to in the Official market category. 

The Special Terms Boards The Odd Lot Board The Equity Board The Debt Board.

Features of the Automated Trading System of Stock Exchange of Mauritius(SEMATS has the following features). There are many features only some of them have been given here. 

On line trading facility One may avail several prices for one order Execution of Order On line report of price as well as trade volume

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Order status may be tracked One may avail of an improved data of the stock market.

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Future of SEM

The Stock Exchange of Mauritius are working on the introduction of index and single-stock futures on

local underlyings and also intend to extend derivatives trading on some foreign underlyings afterwards.

The listing of funds and other companies incorporated in the Global Business sector also represents a

potentially attractive opportunity for the SEM. The Listing Division has been mandated to actively

pursue this objective, propose changes to the listing rules if needed and increase the number of listings

of Global funds and companies.

In their quest to move up in the value-chain of products traded on the Exchange, the SEM and CDS,

subject to approval of the Financial Services Commission (FSC), are planning to introduce the trading

and clearing of Index Futures during the financial year 2009/2010. In recent years, the trading of

derivatives on Exchanges has gained growing momentum and has, in some cases, become the focal

point of Stock Exchange operations, with volumes on derivatives surpassing volumes on cash

instruments. Introduction of derivatives trading on many exchanges has had very positive impact on

liquidity in the underlying instruments, enhanced the process of price discovery and enabled visitors,

both retail and institutional, to manage their investment portfolios in a more dynamic manner, better

manage investment risks and enhance portfolio returns over time. Conscious of investors’ need for new

and innovative products that can ensure dynamic portfolio management, the SEM will, as a first step of

a program that hinges on product innovation, introduce futures contracts on the SEM-7 index and on

some of the most liquid stocks traded on the Official Market.

This Brochure summarizes the key benefits and risks associated with these new products, dwells briefly

on their key characteristics and describes how they will be traded on SEM and cleared and settled by the

CDS.

Futures

Introduction to Futures Contracts

Broadly, a future is an agreement to buy or sell a particular asset on a specified future date at a price

agreed upon today.

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When an investor buys an index future (goes long), he agrees to buy the underlying index at a particular

date in the future. His profit (loss) is dependent on the price of the future at expiry of the contract or

when he closes out his position (i.e. when he sells the contract).

When an investor sells an index future (goes short), he agrees to sell the index at a particular date in the

future. His profit (loss) is dependent on the futures price at expiry or when he closes out his position (i.e.

when he buys the contract).

Specifications of Futures Contracts to be introduced

In the initial phase, the SEM plans to introduce futures contracts on the SEM-7 Index and on a few

liquid stocks traded on the Official Market.

Index futures enable investors to obtain benefits of the price movements of the constitutive stocks of the

Index without the need of actually purchasing or selling the underlying stocks of the Index. Similarly, a

Single-Stock future enables investors to obtain similar benefits without the need of acquiring or selling

the Stock in question. The initial investment required to gain exposure to an Index futures or to a Single-

Stock Future is only a fraction of the actual value of the index constituents or of the underlying stock.

Purchasing a SEM-7 Future constitutes a perfect substitute for holding the seven constitutive stocks of

the SEM-7 Index without actually purchasing them.

The SEM will introduce SEM-7 Index Futures with a maturity of one month. The basis of quotation of

each SEM-7 Index Future will be in index points, with each index worth Re 1. Each SEM-7 Index

Future Contract will be equal to 100 SEM-7 Futures.

Single-Stock Futures on the liquid stocks traded on the Official Market will also have a maturity of one

month. The basis of quotation of the Single-Stock Futures will be in rupees and each contract traded will

be worth 100 Futures.

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4. Potential benefits of SEM-7 Index Futures or of Single Stock Futures

The introduction of index futures and single stock futures constitutes an important developmental step

for the Stock Exchange environment in Mauritius and can generate a number of potential benefits for

market participants, while laying the foundations for the upliftment of our stock market to yet another

level. This section summarises some of the potential benefits that the new products can generate for

investors.

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Return of SMDEX.

Diagram 1, below, shows the trend in daily SEMDEX indices for the past 3 years, starting February

2007 till February 2010. The data are taken from the Association of Brokers’ website and represented

graphically.

Diagram 1.

Throughout the three year period, frequent fluctuations in SEMDEX indices are observed. Rises and

falls in the index occurs at several occasions.

In 2007, the index is seen to be increasing over the year. This is due to different factors, some of which

are the measures taken by the government. The imposition of a tax rate on interest on bank savings has

instigated Mauritian individuals to place their money elsewhere such as in Fund companies, shares, etc.

This has caused an increase in demand for shares on the Mauritian stock market thus contributing to the

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rise in SEMDEX. Also, increased incentives and awareness by the Stock Exchange of Mauritius have

contributed in the rise in indices by encouraging investments in shares and buying financial products.

Also, the devaluation of the rupee during that period has also caused foreign investors to invest in local

shares.

However, as from March 2008, the trend in indices is towards the decline. This effect is mainly because

of the financial crisis which has had its repercussion in the country. This will be explained later in the

report.

As from mid of March, the price of indices began to show a rising trend. Sunil Benimadhu, Chief

Executive Officer of the Stock Exchange of Mauritius explained this movement:

“The Mauritius market lost 50% in, as investors worried about the fallout of the global financial crisis,

but then they realized our companies were not so badly affected, from March to December we had one

of the best rebounds in 20 years, with an 80% gain. We have come back with a vengeance. Our economy

was helped by swift reactions from our authorities including easing policies. We have had a volatile

time, but it has also meant a shift to much more trading on the SEM.

Our exchange is trying to develop the “3 Ps” of exchanges – products, players and participants. We

anticipate the players into African markets will only increase, as they realize that expected returns in the

US and Europe are only 1% or 2% and need to get positive alpha. Beyond equity, we are trying to

develop an active second market in debt instruments, and we are trying to move up the value chain and

introduce derivatives, including an index derivative of the 7 most liquid stocks.

In the past Mauritius has been a base for funds investing into India and China, and we have

traditionally been a business gateway between Africa and the East, whether for foreign direct

investment or others. We are now changing our listing rules to allow more funds to list, including the

global business sector,

We have already changed our rules to allow shorting on the Stock Exchange, including rules for stock

borrowing. Institutions are realizing they can make money from their stocks and we are seeing more

liquidity as people are able to trade more.”

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SWOT Analysis

Strength

Mauritius has a vibrant stock exchange with a market capitalization exceeding US $ 6 billion.

Automated Trading System (ATS)

The ATS or the SEMATS is an automatic trading system developed by the Sri-Lankan based

Millennium Information Technology and the staff of the SEM and the CDS, was launched on 29th June

2001. This has replaced the open outcry system which has typified the Stock Exchange of Mauritius

since its inception. It is a computerized trading system designed to match buy and sell orders placed by

stockbroking companies. Each stockbroker has in his office a computer terminal connected with a server

located at the SEM. The central system software consists of an electronic order book which enables

members to post their buy and sell orders on behalf of their clients and to have their orders matched

automatically. When an order is matched, the broker receives immediately a confirmation of the

execution of the trade.

The main strength of the SEM lies in the benefits provided by the ATS, which eliminates the inherent

operational inefficiencies of the manual trading system by improving market transparency, providing a

speedy and efficient matching of orders and enhancing the variety and quality of market data and

information provided to the market. It also ensures a higher degree of fairness, improved liquidity and

cost-effectiveness. This ultimately helps to improve the interests of players in the market and enables

SEM to operate on an equal footing with other leading emerging markets.

Central Depository & Settlement Co Ltd (CDS)

Strength of SEM can also be viewed through the existence of its computerized share trading system. The

Central Depository & Settlement Co. Ltd (CDS) was introduced by the Stock Exchange of Mauritius in

1996 and began to operate in 1997, to provide centralized depository, clearing and settlement services

for the Mauritian equity and debt markets. This has led to prompt and efficient clearing and settlement

of trades while at the same time to the reduction in some of the inherent risks in the process. This has

made Mauritius one of the first countries in the East African Region to offer such services.

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There exists full compliance with the international standards (Group of 30 Recommendations; Core

Principles for Systemically Important Payment Systems / International Organization of Securities

Commission – CPSS/IOSCO Recommendations) on depository, clearing and settlement systems.

The CDS qualifies as an Eligible Securities Depository under the US Investment Company Act Rule

17f-7. This rule requires US registered investment companies to hold their securities only in Eligible

Securities Depositories to reduce risks associated with offshore investments.

The CDS also offers IT outsourcing services to the Stock Exchange of Mauritius Ltd for the technical

management of the automated trading system.

The strength of SEM can be illustrated in the way in which SEM adapts to accounting regulations to

meet international standards. Indeed the Stock Exchange of Mauritius complies with the nineteen

principles of the WFE (World Federation of Exchanges). This step was followed by two close

investigation visits by officers and Board members of the WFE to ascertain in the ground that the SEM

was fully compliant with the standards of well-regulated and operationally efficient Exchanges.

As mentioned by Mr Jean de Fon Chaumiere, the membership of the WFE “identifies the SEM as

having assumed the commitment to prescribed business standards, recognized as such by users of

exchanges, as well as by regulators and supervisory bodies.”

The fact that 43 companies are already admitted to the DEM (Development & Enterprise Market) is

encouraging since it indicates maturity of the market in moving towards a flexible and regulated market

environment, instilling greater investor confidence, protection and dynamism in the securities market in

Mauritius by providing them with new investment opportunities.

Mr Sunil Benimadhu: “The Ai Index Awards constituted an excellent opportunity to showcase to the

international financial community the progress achieved by the financial services institutions in many

African countries. The highly commended status of the SEM and the attainment of the No. 2 position in

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the ‘Best African Stock Exchange’ category, testifies the progress achieved on the operational and

regulatory front and can only strengthen international investors’ confidence in our market.”

The SEM can also be said to be strong in the opening up of its markets to foreign investors in 1994,

subject to certain restrictions, and the possibility of offshore funds to be listed on the stock exchange.

The fact that foreign exchange controls have been suspended in Mauritius in 1994 has facilitated the free

repatriation of funds.

SEM is widely considered as a reference Exchange in Africa.

First Exchange in Sub-Saharan Africa to move to fully-automated stock market infrastructure.

SEM & CDS have been very active and successful in exporting services to Exchanges and

financial services institutions in Africa.

CDS, in partnership with MIT, has automated the market infrastructure in Kenya, Botswana,

Ghana, Tanzania and Lusaka (forthcoming)

SEM was ranked No 2 Exchange in Africa after the JSE by Africa Investor in 2007, in terms of

market infrastructure, modern & flexible regulatory environment, and innovative initiatives to

develop capital markets.

SEM is currently one of the two Exchanges in Africa running a second market for medium-sized

companies.

SEM is a full-fledged member of WFE.

First Exchange in Africa to demutualise.

SEM is one of the three Exchanges in Africa included in the newly launched MSCI frontier

emerging markets Index.

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Weakness

The stock exchange of Mauritius suffers from number of weaknesses. The principal ones are mentioned

below:

Poor communication system-

The communication system of the stock market in Mauritius is rather poor. This is clear from the

fact that brokers often do not report their transactions to the exchange authorities and clients do not

know how much commission the brokers charge.

Lack of professionalism-

While there are brokers who are highly professional in their dealings, the majority of brokers seem

to lack high professional standards. Many of them lack the professional expertise to guide and

counsel their clients. Further, they resort to actions, which may hurt the interests of their clients.

Weak regulation-

Even though the Securities Act 2005, which replaces the Stock Exchange Act 1988 gives the

government with substantial powers, the regulation in practice tends to be somewhat ineffective. The

Financial Services Commission (FSC), which is supposed to supervise and control the stock

exchanges under the Stock Exchange Act 1988 , appears to be grossly understaffed and

overburdened. There appears to be a crying need to strengthen the regulatory machinery because of

phenomenal growth in the volume of trading.

Dominance of financial institutions-

The stock market in Mauritius is significantly influenced by the actions of financial institutions.

Even though the operations of these institutions are confined to a small group of shares, there impact

is often quite pervasive. Under the influence of institutional buying, the market turns buoyant;

contrariwise, under the pressure of institutional selling, the market becomes depressed.

Poor liquidity

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The Mauritian stock exchange suffers from poor liquidity. Barring a small proportion of scrips,

which are actively traded and highly liquid, most are traded infrequently and, hence, lack liquidity.

Kerb trading

Transaction between brokers who assemble outside the stock exchange after market hours are

referred to as ‘kerb transactions’. Though considered a punishable offence, kerb trading flourishes

and the issue whether it is legal or illegal is considered irrelevant by most brokers. In fact, brokers

often report kerb transactions along with transactions done during official business hours.

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Opportunities

The SEM is presently going through a strategic reorientation of its activities and gradually moving away from an equity-based domestic Exchange to a multi-product internationally oriented Exchange.

1. Changes to listing rules will widen the variety of funds

The major changes which the SEM brought to its Listing Rules in the early 2010 to align them with the

Collective Investment Schemes Regulations 2008 will enable the SEM to be positioned as an attractive

venue for the Listing of Global and Specialised Funds. The Exchange has made its Listing Rules more

flexible to reflect the specific attributes and characteristics of the Specialised Funds it would like to list

on the SEM and this initiative will make the SEM a platform of choice for the listing of a wide variety

of funds such as Specialised Collective Investment Schemes, Professional Collective Schemes Export

Funds and Global Schemes.

2. Introduction of derivatives trading will transform the SEM into an international exchange

The Stock Exchange of Mauritius is seeking to position itself as a reference market both in the region

and on the international arena. As such, the SEM is also keen in diversifying its products offerings

which will enable it to gradually emerge as an international exchange, and in this respect the SEM

decided to introduce the trading and clearing of Index Futures during the financial year 2009/2010. In

recent years, the trading of derivatives on Exchanges has gained growing momentum and has, in some

cases, become the focal point of Stock Exchange operations, with volumes on derivatives surpassing

volumes on cash instruments. Introduction of derivatives trading will have a positive impact on liquidity

in the underlying instruments, enhance the process of price discovery and enable visitors, both retail and

institutional, to manage their investment portfolios in a more dynamic manner, better manage

investment risks and enhance portfolio returns over time.

3. Positive Investment Inflows

From a foreign investment perspective, the Mauritius Bourse attracted strong foreign investor interest

particularly over the last six years, generating positive investment inflows on many listed companies.

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Whilst 2007 was a record year, 2008 and 2009 have been resilient in terms of net foreign investment

flows despite the global crisis, reaching a commendable positive level of net inflows. In 2010, we are

already stepping up our efforts via international conferences and roadshows, which will help to place the

SEM on the radar screen of institutional investors who are keen on frontier emerging markets that are

well regulated and adhere to international best practice.

4. Visibility of the SEM and integration within international financial market

The growing interest from international investors has prompted well-known index and data providers

like Standard & Poors, Morgan Stanley, Dow Jones and FTSE to include our stock market in a number

of new indexes they launched over the last couple of years to track the evolution of some key frontier

emerging markets. SEM also went live on Bloomberg since 2009, and forms part of the only three stock

markets in Africa to be included in the list of stock markets that Bloomberg is tracking live on a daily

basis. This live coverage of the SEM on Bloomberg and global index providers constitutes a positive

step that will enhance the SEM’s visibility at the international level and accelerate the Exchange’s

integration within the international financial markets.

5. Growth of capital markets and broader choice of investment for investors

The preceding achievement can only stimulate the Mauritius Bourse to mobilise its resources to focus on

other ground-breaking initiatives that will fuel further growth of capital markets in Mauritius, and enable

the Exchange to better serve the local and foreign investment community. The SEM has been among the

most innovative exchanges in Africa on the operational and regulatory fronts. It is now currently

working on how to offer its investors a broader choice of investment products ranging from cash

instruments (stocks, treasury bills, corporate and government bonds) to sophisticated derivatives

instruments (futures contracts on SEM-7 Index).

Overall, it is obvious that the SEM has made some important strides in its development process since

1989 and looks well poised to undertake a number of reforms in order to contribute towards the

enhancement of the operational and regulatory efficiency of the local market.In the forthcoming years,

the SEM aims at consolidating its position with a view to further contributing to the development of the

Mauritian economy and of capital market activities on the national and regional fronts.

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Threats

The stock market was opened to foreign investors after exchange controls were lifted in 1994; foreign

portfolio investors recently accounted for almost a third of total turnover. Another key aspect of the

Mauritius economy involves its Global Business Sector (offshore financial sector). Such companies,

designated by Mauritius as Global Business Companies (GBCs), are estimated by Mauritius to account

for approximately four percent of GDP. However, the fact that GBCs account for 90 percent of India's

foreign direct investment suggests that the overall importance of GBCs to the Mauritius economy may

be greater than is suggested by their relatively small contribution to GDP. GBCs benefit from the

favorable tax and regulatory regime. However, the lack of transparency makes it difficult to assess the

degree of compliance with the OECD Principles, which are generally not relevant to the type of business

activity conducted by such firms; moreover, none of these firms are listed in Mauritius.

The SEM operates two markets, i.e. the Official Market, on which securities of listed companies are

traded, and the Over-The-Counter (OTC) Market, which is a more lightly regulated market. Listing

requirements are in line with the standards adopted by international markets. The Official Market

commenced operations in 1989 with five listed companies and a market capitalization of about Mau Rs

2.8 billion (USD 92 million). As of December 2000, 40 companies were listed on the Official Market3

with a total market capitalization of USD 1.3 billion), equivalent to 30.1 percent of GDP for 2000.4

There have been few new listings over the past five years, and market capitalization has declined. This

has been the result of several factors, including the SEM’s lack of liquidity, increased

compliance/disclosure requirements imposed on listed companies, and poor share price performance, as

well as the general trend among major institutional investors towards more developed economies rather

than emerging markets over the past seven years.

AS A SMALL OPEN ECONOMY FULLY integrated into world markets, Mauritius is vulnerable to external shocks

Globalisation has ushered in a process of integration of the world global financial markets into a mega

market place was evident during the Asian financial crisis of the later nineties and the simultaneous

downturn in stock markets across the world over the past three years. Even though remote small island

states like Mauritius and Seychelles were not connected with the origins of such crises, the effects

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crossed their borders uninvited. Whether we like it or not, financial globalisation is a phenomenon

which is rapidly changing the world economic landscape. Small island states tend to be economically

vulnerable as a result of their high degree of exposure to external economic conditions. This means that

their financial development is likely to be dictated mostly by forces outside their control. In other words,

changes associated with intense competition, maintenance of sound macroeconomic policies,

management of risks, cross-border bank supervision, and modernisation of financial legislation are

likely to be, to a large extent, influenced by events in larger countries.

Modernisation of Financial Legislation and Institutions

The great challenge faced by Mauritius concerns issues relating to implementation and enforcement of

the legal framework, and enhancing the overall institutional capacity to better ensure compliance with

legal provisions. Some small jurisdictions have succumbed to the temptation of allowing money

laundering activities in their financial institutions. This represents a threat to the stability of the

international financial markets, and gives a bad reputation to the jurisdictions concerned. The Indian

Ocean small island states should do their utmost to avoid such pitfalls, and should develop their

financial sectors in line with the OECD guidelines, while at the same time, taking steps to modernise

their financial legislation and introducing control mechanisms to detect unlawful activities.

Financial and Capital Markets

The short-term money, foreign exchange, and treasury bill markets are relatively underdeveloped. This

makes it difficult for banks and other financial institutions to manage and allocate risks efficiently. It

also impedes the development of more sophisticated financial instruments that would enable Mauritian

companies to efficiently hedge risks. The longer-term government and corporate bond markets are also

underdeveloped. This is paradoxical given the strong and rising demand for longer-term assets from

contractual savings institutions.

While the institutional, legal, and technical infrastructure of the stock exchange (SEM)

is highly developed, the market is characterized by low volume, poor liquidity and lack of

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depth. From 1997 to 2002, market capitalization declined from 43 percent to 19 percent of GDP; the

average price–to–earnings ratio fell from approximately 14 to 6; and average turnover hovered around 5

percent, indicating that the market is small, even relative to the small economy.

Many of the challenges which face the market fall outside the scope of government

policy, including the small scale of the domestic market, the need for local investors to diversify

internationally, the recent global bear market, and the withdrawal of foreign portfolio investment from

emerging markets. However, the GOM can take certain policy measures to promote a more active

capital market. Investor confidence can be enhanced by improved standards of disclosure and corporate

governance, and by more effective regulation and supervision of market participants, which is

particularly critical in a market where there is considerable overlapping ownership among issuers,

traders and investors. Measures to diversify the issuer base, including privatizations and greater

regionalization, should also be pursued. Finally, the government should review the role of government-

sponsored funds, which may create distortions in the pricing of securities.

Money Laundering

While the industry confers important benefits in terms of global recognition, and

development of world class financial, legal, accounting, and auditing skills, restrictions on dealings in

local currency and the generally wholesale nature of the offshore financial

business have implied a small impact of offshore activities on employment and economic activity. The

sector does not therefore currently represent a systemic risk for the domestic economy, though it does

pose reputational risks associated with money laundering or the financing of terrorism. The authorities

are aware of these risks, and are taking steps to mitigate them.

The Global Business License 2 (GBL2) firms constitute the most significant source of potential

AML/CFT risk to Mauritius. These companies have no physical presence in Mauritius, and are

inherently difficult to supervise and monitor. Many were licensed at the time when Mauritius did not

have strong customer identification requirements in place. Stricter licensing requirements are now in

effect and monitored, and the FSC is vetting existing license holders.

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The regulation and supervision of the securities industry require considerable strengthening. The FSC is

currently preparing key legislation with respect to securities, collective investment schemes (CIS), and

market intermediaries. Completion of this legislative agenda is critical to address existing deficiencies

and gaps in the legal and regulatory framework. Many of the challenges which face the market fall

outside the scope of government policy, including the small scale of the domestic market, the need for

local investors to diversify internationally, the recent global bear market, and the withdrawal of foreign

portfolio investment from emerging markets.

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Impact of Financial Crisis on SEM

Global Financial Crunch

The US subprime crisis has been building up over several years. Banks and mortgage lenders have been

issuing too many high-risk home loans (called subprime loans), which. is now causing havoc in the

global financial system.

What Caused The Sub prime Crisis?

Due to rising interest rates, falling property values and other macro-economic factors, some Americans

are finding it impossible to keep up with their subprime mortgage repayments. This has caused wide-

scale mortgage defaults, leading to home repossessions.

The problem is these homes are not worth as much as they once were. So the equity locked in the house

is not enough to repay the original loan.

Disturbingly, these people were originally flagged as having poor credit histories, but that did not stop

mortgage lenders from handing out massive loans to fuel the property boom.

To make things worse, these subprime mortgages were passed on by the banks in the guise of complex

financial products, which were then re-sold to investment funds. The result is that the banks and the

general public is now exposed to this excess of "bad debt" – i.e. money that will never be paid back –

through pension and investment funds. The situation is labeled the subprime crisis for originating from

subprime loans.

Financial crisis in Mauritius

The emergence of the US Credit Crisis has led towards stronger financial integration among

international financial markets. In that respect, SEMDEX, the main index for the Stock Exchange of

Mauritius, is also believed to follow any movements in foreign stock markets. Indeed, the crisis has

already affected the real side of the Mauritian economy in form of lower demand for hotels, undermined

export of textile products and lower entailed higher risk aversion level with psychological investments.

Above all, with substantial rise in risk aversion from the crisis, this has effects such as herd behaviour

impregnating the performance of SEMDEX. Ramlall (2009)

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The economic outlook in the US and EU, the two largest export markets of emerging countries, has

worsened as the credit crisis has deepened and some major players are in recession. How does this affect

us?

The grey outlook for Europe has affected the performance of our hotel stocks. Tourist arrivals are also

bound to suffer as our tourists come mainly from Europe.

The now famous "financial crisis", which started in the US markets in July 2007, has already had a spill-

over effect on European banks and other global major banks and economies. A recent observation that

sums up of how people view the current situation: "On the left side of the balance sheet, nothing is right,

on the right side of the balance sheet, nothing is left." Though some might argue that most economies

are decoupled with one another, we believe that the Mauritian economy and local stock market is fairly

correlated with US and European economies. From February 2008, the local stock market and Mauritian

economy (which have seen growth forecasts trimmed) have been put under enormous pressure and

major players such as the Central bank have been in the dilemma of sustaining growth or inflation

control, thus the split in the Central Bank Monetary policy.

Between the positive assurances of our ministers and the pessimistic outlook of our lobby groups, it can

be hard to make sense of how the financial crisis has and will continue to affect the Mauritian economy.

Being a small and open economy, Mauritius can hardly be sheltered from global economic hiccups.

Over the past six months, exports to Europe, our main trading partner have come under increasing

pressure and tourism receipts have slowed. Over the next year, the current account deficit is likely to

widen and volatile capital inflows should continue to slow. Despite a favourable interest rate differential,

the Mauritian Rupee has come under sustained pressure since the end of April and has since then

depreciated by 17% vs. the USD putting a negative dent on inflation. The medium term outlook for the

MUR/USD remains uncertain but biased towards the downside unless a sudden large inflow of Foreign

Direct Investment. On its part the mere fact that Europe may be in deeper trouble than the US has had a

negative impact on the EUR and the USD has rallied from 1.58 to 1.34 USD/EUR. Volatility in the

MUR/USD exchange rate has shot up in recent months and the recent 40M dollars worth of dollar sales

in the FOREX market has done precious little to break the Rupee's volatile trend. Hence the Rupee has

been negatively affected by the crisis so far. Over the next twelve months, the Bank of Mauritius is

likely to be forced to sell more dollars in the market as our trade balance deteriorates (supply of forex

dries up as export receipts slow) which in turn is likely to absorb in a certain amount of Rupee liquidity

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out of the money markets. The crisis seems to have redirected the priorities of the Monetary Policy

Committee towards growth rather than inflation. Real interest rates in Mauritius are negative and

detrimental to long term growth. The emergence of the US Credit Crisis has led towards stronger

financial integration among international financial markets. In that respect, SEMDEX, the main index

for the Stock Exchange of Mauritius, is also believed to follow any movements in foreign stock markets.

Indeed, the crisis has already affected the real side of the Mauritian economy in form of lower demand

for hotels, undermined export of textile products and lower investments. Above all, with substantial rise

in risk aversion from the crisis, this has entailed higher risk aversion level with psychological effects

such as herd behaviour impregnating the performance of SEMDEX.

2007

The path of the main indices of the Stock Exchange of Mauritius (SEM) appeared to have followed a

similar pattern as those of the South East Asian economies. The SEMDEX which is the key index of the

SEM remained on the rising trend throughout 2007 influenced by the booming economy and its

remoteness to the financial turmoil. This was perceived as positive for many investors in quest of

lucrative investments. While banks continue to trail behind rising profits, hotels had part of their

earnings adversely affected by the appreciating rupee.

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The local market remained buoyant throughout 2007 despite uncertainty surrounding financial markets

internationally. The SEMDEX posted a return of about 53.78 percent in 2007 while in the first quarter

of 2008, the index achieved a return of 1.55 percent, synonymous to a significant correction. The main

drivers for the upbeat market emanated from the blue chips, basically the banks and hotels sector, which

continued to reap higher profits. The SEM-7, which comprises the seven largest eligible shares in terms

of market capitalisation, liquidity and investibility gained 80.55 percent in 2007 while in the first quarter

of 2008, it posted a negative return of 1.46 percent. The SEMDEX hit a fresh closing high of 2,101.37

points on 18 February 2008, boosted by the announcement of one bank’s pretax profit growth while

another listed bank posted an increase in group results. Moreover, the imminent listing of a company on

the SEM is also likely to be supporting sentiment.

The financial year 2008/2009 was marked by the severe global financial crisis which started in the

United States and spread rapidly to Europe and the rest of the world. The Mauritian stock market

which historically had shown low correlation with the global markets, was not spared this time. The

SEMDEX (all shares index) lost 36.14% in 2008 while the SEM-7 (blue chip index) lost 44.03%. As

the crisis spilled over to the real economy, there was a sharp decline in market turnover in

December 2008 and in the first quarter of 2009. However , with the P/E ratios and dividend yields

reaching attractive levels, the market turnover picked up again in the second quarter of 2009. The policy

responses to the crisis together with the significant reduction in interest rates, contributed to a major

boost in market performance in the second quarter of 2009. After loosing 9.36% and 12.03%

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respectively in the first quarter of 2009, the SEMDEX and SEM-7 gained 32.22% and 36.65 %

respectively in the second quarter of 2009. The worldwide policy responses to the crisis would lead to

a gradual recovery of the global economy in 2010. It should be noted that the Mauritian banking system

showed a lot of resilience and the banks were not affected by the subprime crisis. Moreover , the

economic reforms and prompt stimulus packages initiated by the Mauritian government allowed the

country to steer through the crisis relatively unscathed and be ready to bounce back in the near future.

Growth picture towards the downside

Mauritian stocks too have not been sheltered from this crisis. While sensitisation by the media has

certainly contributed to a certain degree of panic and aberration in the prices of certain stocks, local fund

managers have continued to increase their cash positions and have reduced their exposure to the hotel

stocks favouring instead the relatively more stable and liquid bank stocks. This in our view puts a floor

on the prices of these stocks as our market remains dominated by institutional based funds. The grey

outlook for Europe has darkened significantly in recent months, so too is the performance of our hotel

stocks. Whilst many have sold in panic, investment professionals have already priced in the less rosy

earnings outlook for 2009 and have substantially raised the cash level of their portfolios starting July

2007 and June 2008. Once there is more certainty as to when Europe and global economy will recover,

we may see rotation towards hotel stocks again which is not likely to happen any time soon or before

first half 2009.

On the inflation side we have noticed that it has negatively affected profitability across the board as

operating costs have increased drastically. The growth picture, as we see it, is biased towards the

downside in 2009 but GDP growth should, we believe, remain above 4%.

However, we believe that there is value to be found in many stocks, with many of them trading at a Price

Earnings Ratio below 10, for investors with long term view. There will be a lot of volatility in the

coming months and while prices remain biased towards the downside in the short term, if you are patient

and have a well diversified portfolio, we would certainly recommend staying in this market for now or

coming in when prices are so depressed.

As many believe that the current crisis can be judged in retrospect as the worst one since Second World

War we believe that the global economy is in better and stronger shape than it was in other crises, thus

has no reason why it will last forever. Despite the financial pain, stock markets will surely forget this

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financial hangover when the next speculative party begins. Financial markets aren't dancing now, but

they will surely dance someday, it is not the first crisis and surely will not be the last one. Investors must

remember that the stock market is forward looking and is a leading indicator of economic activity as it

tends to recover before the economy or falls fall before a recession. If Europe recovers in 2010, then our

stocks should begin to recover in 2009.

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Conclusion.

The Stock Exchange of Mauritius is considered as a vehicle for economic growth and economic success

for Mauritius. The progression in the indices is attributed to measures and incentives by the government

and in collaboration with the stock exchange. The SEM’s contribution to the financial sector is

attributed to its innovative products and services together with providing proper information and

awareness to Mauritian investors. Currently, the SEM offers the possibility for even offshore companies

to be listed on its market.

Rules and Regulations by the stock exchange set up an effect of simplicity in the transaction and create

flexibility. The Financial Services Commission, as a regulatory body, ensures transparency and viability

of investing in shares. Moreover, the implementation of the SEMATS has helped to improve the

interests of players in the market and enables SEM to operate on an equal footing with other leading

emerging markets.

The recent financial crisis had had severe repercussions in SEM Indices and many other financial

products. But now overall share prices are rather stable and are even showing a positive increase in the

long run since mid 2009.

Overall, it can be observed that the SEM is running through rapid growth and innovations and may

eventually stand among leading stock exchanges of Africa, despite of its geographical proximity to other

emerging economies. But still, there need to be even more works and efforts to improve the efficiency of

the stock exchange to provide the investors with a better platform in which they can invest their money

and have good return.

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