Recently, news papers reported about the potential sale of the assets of Steel Rolling Mills over a Ushs50bn loan. On September 2014, the Daily Monitor reported that Sembule Group of Companies had lost its UShs27b factory in Nalukolongo over unpaid debts. On Wednesday, 15th June 2016, the New Vision newspaper carried a notice of sale of assets inviting sealed tenders from the general public for the purchase of the core assets of Parambot Breweries Limited (in Receivership). Such events are becoming common because small and medium enterprises are reluctant to approach ad utilize the Uganda Securities Exchange as a medium for raising funding for their operations.

Uganda has an established capital market consisting of the Uganda Securities Exchange (USE) as the trading platform for debt & equity securities; and the Capital Markets Authority (CMA) which is responsible for licensing intermediaries & regulating the conduct of business of the USE as well as other intermediaries such as brokers and fund managers.

Notwithstanding the existence of a good capital markets legal & institutional framework, Uganda’s private sector continues to rely on short-term bank financing to support its long term growth while government tends to rely on borrowing & funding from development partners to support its development agenda.

Of all the listed businesses on the Uganda Securities Exchange, none is a family controlled business. The reasons are simple enough, and understandable:

a) among Uganda’s several family firms, the overwhelming majority of families want to retain control of their business.

b) Other privately owned firms cite the possibility of extra financial disclosures and the desire to maintain confidentiality regarding their affairs.

What these firms do not realize is that this constrains their options for growth as the possibilities for accessing sources of cheap and patient capital are limited.

Consequently, such firms end up having a mismatch between the company’s business/strategic objectives and the type of capital used to finance them.

As these companies gradually become too heavily indebted, this bank debt significantly increases the risk of bankruptcies or other insolvency interventions. In addition, the high levels of bank debt combined

with inadequate short term working capital for operations erodes the ability of company owners and or management to carefully evaluate the incremental cost of funds when borrowing. The end result of this is a situation where companies end up employing a less than Optimal Capital Structure

To avoid this mismatch, SME’s would do well to carefully consider and evaluate the various options available to them to raise capital with a view to diversify sources of funding away from short term commercial bank financing.

These options traditionally include:a) Self financing: This can only be achieved through

consistent generation of a company’s own capital from its own income, instead of acquiring it from external resources. Most growing companies however are not in position to retain their earnings because they are at a relatively young stage.

b) Bank loans: are the most “traditional financial resources and should normally be used to finance smaller projects. They are also quite expensive as a result of the high interest rate environment prevailing in Uganda

c) Private Equity; should be used to finance extraordinary events such as mergers, acquisitions, and innovations.

d) Initial Public Offers (IPOs); An initial public offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be undertaken by large privately owned companies looking to become publicly traded.

How does the raising finance through the stock market help companies optimize their Capital Structure

Optimal Capital Structure is defined as the mix of debt and equity which minimizes the weighted average cost of capital.

Raising finance through commercial bank debt from exposes companies to factors affecting cost of capital that the firm CANNOT CONTROL especially the high interest rate regime and the level of taxes;

On the other hand, raising finance through listed equity exposes companies to factors affecting cost of capital that the firm can CONTROL. These include i) Dividend policy; and ii) Investment policy;

By optimizing what is in the firm’s control the firm can significantly lower its cost of capital.

When a company raises financing through issue and listing of shares on the stock exchange, its cost of equity capital is the dividend return adjusted for growth and this dividend return is determined by the company’s dividend policy

which is in the control of the company. In other words, the company decides when to pay dividends and how much to pay. Similarly, when a company raises financing through issue and listing of Corporate bonds on the stock exchange, its cost of debt capital is the interest payments adjusted for tax (and these are tax deductible). Therefore, the company lowers its cost of debt capital since the coupon interest payments are much lower than commercial bank lending rates because of the relatively higher interest rate regimes prevailing in the region and subsequently higher commercial lending rates;

RAISING FINANCE THROUGH THE UGANDA SECURITIES EXCHANGEIn raising financing through the Uganda Securities Exchange, a company may issue either shares or corporate bonds (debt). Both shares and bonds on the stock market may be issued through an offer to the public such as the Umeme Limited issue or a private placement to a few select investors such as the Shelter Afrique bond placement.

Thus for many entrepreneurs, if your company requires funds to grow or expand, the Uganda Securities Exchange has a market segment for that. The current segments for raising capital at the Uganda Securities Exchange are as follows:i) The Main Investment Market Segment : Shares of

large companiesii) The Growth Enterprises market Segment: Shares of

small, medium and growing companiesiii) The Fixed Income Market Segment: Corporate

Bonds of all companies.

Whatever your company’s size or sector, the Uganda Securities Exchange can help it access the deepest pool of patient capital. Listed companies meet the highest listing standards helping to raise their corporate profile and increase their exposure to investors.

GUIDELINES TO LISTING ON THE UGANDA SECURITIES EXCHANGE (USE)

INTRODUCTIONThe USE was formed in 1996. The USE is licensed as an exchange under the Capital Markets Authority (Establishment of Stock Exchanges) Regulations, 1996. It has operated as a market place for the trading of financial products for over 18 years. In this time, the USE has evolved from a ‘trading floor based equities trading market’ to a modern securities exchange providing fully electronic trading, clearing and has extensive surveillance capabilities.

In July 2015, the USE implemented a new trading platform (Aventto) in the Equity and Bonds Markets. Following this successful transition, the new Automated Trading System can execute over 1,000,000 transactions per second. The change allows for increased liquidity and more algorithmic traders. The USE is also a major provider of financial information.

1. WHY SHOULD A COMPANY RAISE CAPITAL THROUGH LISTING ON THE UGANDA SECURITIES EXCHANGE?There are a number of benefits that may flow from listing on the Uganda Securities Exchange:

• FUNDINGIt is often cheaper to raise equity capital rather than

to rely on debt finance, to fund the expansion of a company’s business, and a listed company is more able to raise such equity capital.

A capital raise will better enable the company to obtain other forms of finance, such as bank loans and rights issues and bonus issues. A listing will enhance the status of the company and providers of the finance will be comforted by the fact that its financial information and actions will be subject to the USE and public scrutiny.

A listing enables a company to use its shares to fund acquisitions, as sellers are more likely to accept listed shares as consideration.

• SHAREHOLDERSA listing will better enable the existing shareholders

of the company to realise all or part of their shareholdings, thus making it a more attractive investment.

The value of the company’s shares will be enhanced if demand is greater than supply.

Get your company/business listed on the Uganda Securities Exchange through an Initial Public Offer and generate cheap and patient capital to fund you business.

WHY SMES SHOULD EMBRACE UGANDA’S CAPITAL MARKETS AS A MEANS OF RAISING FUNDING

A listi ng will give the company a wider shareholder base and broaden its exposure.

• EMPLOYEESA listi ng will enhance the status of the company which will bett er enable

the company to att ract and maintain good employees.A listi ng will make a company’s share incenti ve scheme more att racti ve to

employees, as their shares will be more marketable.

• PERFORMANCE OF COMPANY The enhanced status of being listed should improve the company’s

dealings with banks, suppliers, distributors and customers, which could have a positi ve eff ect on the company’s overall performance.

2. WHAT ARE THE DISADVANTAGES OF LISTING?

• COST OF LISTING In additi on to the costs of listi ng, the company will have to pay an annual

listi ng fee to maintain its listi ng (see below).

• ENHANCED REQUIREMENTSUpon listi ng, the company is bound to comply with the Regulati ons of the

USE. These regulati ons impose requirements on the company beyond those required under the Companies Act.

Complying with these requirements can be expensive in terms of cost and management ti me.

Listed companies can be sancti oned by the USE, if they breach the Requirements.

3. THE LISTING PROCESS

• APPOINTMENT OF PROFESSIONAL ADVISORS It is appropriate to consult a competent and experienced professional

advisor before deciding to raise capital. If a decision is made to apply for a listi ng, the company should appoint appropriate professional advisors.

• SPONSOR The appointment of a sponsoring broker is required by the USE to be able

to list on the main board. The sponsor’s main responsibiliti es include:

advising the company as to the applicati on of the Requirements and the directors as to the

nature of their responsibiliti es and obligati ons as directors of a listed company sati sfying itself that:

the criteria for listi ng are met and that the company is suitable to list; the company is guided as to the applicati on of the Requirements; and the directors have had explained to them the nature of their

responsibiliti es and obligati ons as directors of a listed company; submitti ng the listi ng documentati on to the USE; andfi lling a liaison role between the USE and the company.

• INVESTMENT ADVISOR It is advisable for the company to also appoint a corporate advisor.

(Corporate advisors are usually the corporate fi nance divisions of stockbrokers, merchant banks or auditi ng fi rms. There is oft en an overlap between the functi ons of the corporate advisor and the sponsor, and where an Investment bank or stockbroker provides both corporate fi nance and sponsoring services, the roles are frequently combined).

The corporate advisor’s main responsibiliti es include: advising on the method of listi ng, the marketi ng, the size and terms of

the off er, the ti ming and pricing of the off er; advising on market conditi ons and the potenti al demand for the

company’s shares; co-ordinati ng the listi ng process; draft ing the listi ngs documentati on, with the assistance of the company

and the company’s legal advisor, accountant and sponsoring broker; approaching the investment community with a view to generati ng a

demand for the company’s shares; if the method of listi ng to be adopted is a placing, arranging the placing;

and if the method of listi ng to be adopted is a public off er and the off er is to

be underwritt en, underwriti ng or arranging the underwriti ng of the off er.

• LEGAL ADVISOR Companies are also advised to appoint a competent legal advisor. The

legal advisor’s main responsibiliti es include: assisti ng with the draft ing of the listi ng documentati on to ensure that all

legal requirements are complied with; if there is an underwriti ng or a placing, draft ing the necessary

agreements; andpreparing share opti on schemes for the company.

• ACCOUNTANT The USE requires an accredited independent accountant (a registered

accountant and auditor) to report in the prospectus or pre-listi ng statement, inter alia, on the profi ts of the company over the previous three years and the fi nancial positi on of the company over the previous three years.

• SHARES REGISTRAR (TRANSER SECRETARIES) Shares Registrar (Transfer secretaries) are responsible for setti ng up the

company’s register of members, allotment to the depository, the issuing of share certi fi cates, the registrati on of transfers and the mailing of company circulars.

The USE Securiti es Central Depository is enti rely dematerialized implying that shares are maintained in electronic form.

• PUBLIC RELATIONS CONSULTANT Public relati ons consultants are frequently used to assist with promoti ng

the positi ve image of the company before a listi ng.

• PRINTERS The company should contract with a fi rm of printers to print the share

certi fi cates and prospectus or prelisti ng statement.

• LISTING TIME FRAME The listi ng ti me frame normally covers between 9 and 13 weeks,

depending on the method of listi ng, the competence of the professional advisors and the complexity of the listi ng. The typical ti me frame may be summarized as follows:

WEEK ACTIVITIES RESPONSIBILITY0 Appoint advisors

Meet to consider: Legal, fi nancial and tax implicati onsMethod of listi ngPrepare ti metable for listi ngCommence preparati on of accountants

reportCommence draft ing of documentati on

Company

Accountant, Legal Advisor,AccountantCompany, AccountantAccountantSponsoring Stockbroker

1 - 3 Draft ing meeti ngs to fi nalize draft documentati on (prospectus or informati on memorandum)

Finalize accountant’s report

Accountant, Legal Advisor, Sponsoring Stockbroker, Accountant

4 • Draft documentati on submitt ed to the USE for informal comment and Registrar (if public off er)

Sponsoring Stockbroker

5 - 8 • Formal Approval from the Uganda Securiti es Exchange

• Formal Approval from the Capital Markets Authority

Sponsoring Stockbroker

9 - 10 • Listi ng commences if an introducti on, or placing or public off er commences

11 • Placing closes 12 • Listi ng commences if a placing or public

off er closes13 • Listi ng commences if a public off er

• COST OF LISTING The costs of listi ng will depend upon the method of listi ng adopted and

the complexity of the listi ng. The listi ng fees of the USE, which are extremely low by internati onal

standards, can be found at htt ps://www.use.co.ug/uploads/legal/regulati ons/USE Fees, Charges

and penalti es Rules 2012.pdf

• PROFESSIONAL ADVISORS’ AND OTHER FEES:Professional Advisor FeesSponsoring Stockbroker/ Investment Advisor

Negoti able, depending on the size and complexity of the listi ng and the amount of work required.

Legal Advisor Fees based on hourly rates.Accountant Fees based on hourly rates.Shares Registrar VariablePublic Relati ons Consultant VariablePrinters Variable

4. THE CHOICE OF MARKET

The USE operates 3 markets:• the Main Investment Market Segment (MIMS) for mature companies;

and• the Growth Enterprises Market Segment (GEMS) for growing companies

and• the Fixed Income Securiti es Market Segment (FISMS) for bonds.

Each of these markets has diff erent criteria for listi ng.

ELIGIBILITY CRITERIA FOR LISTING EQUITY SECURITIES ON THE MIMS AND GEMSare as follows:

Requirement Criteria for MIMS Criteria for GEMSSize: Share Capital Minimum authorized issued and

fully paid up share capital of Ush. 1 billion.

No Minimum authorized issued and fully paid up share capital.

Size: Net Assets Immediately before the IPO should not be less than Ush. 2 billion.

No Minimum Net Assets immediately before the IPO.

Track Record, profi tability and future prospects

Published audited fi nancial statements for a period of at least 5 years.

+ve profi ts aft er tax att ributable to shareholders in at least 3 of the last 5 completed accounti ng periods prior to listi ng.

Statement of fi nancial positi on for the company if one year old or less.

Refl ect good growth potenti al.

Minimum Shareholding

Following the IPO at least 20% of the shares must be held by not less than 1000 shareholders excluding employees.

Following the IPO at least 20% of the shares must be held by not less than 100 shareholders excluding employees/family members of the controlling shareholders.

The USE may list companies which do not strictly comply with the above requirements, but this will only occur in excepti onal circumstances.

ELIGIBILITY CRITERIA FOR LISTING DEBT SECURITIES ON THE FISMS are as follows: Applicati on by sponsoring broker. Declarati on from sponsoring broker. Applicati on and or approval by Uganda Securiti es Exchange. Informati on Memorandum. Pricing Supplement.

Report from a credible credit rati ng agency recognized by the CMA on the fi nancial capability of the guarantor if it is a foreign enti ty.

Proof of transfer of applicati on fees. In the event that the bond issuer will use fi nancials of its guarantor, then

the following exempti ons can be sought under CMA Corporate Bond guidelines Secti on 7:

Exempti on from paid up capital requirement Exempti on from profi ts Exempti on from Accountant’s reports on audited fi nancial accounts Exempti ons on cash fl ow projecti ons

5. METHODS OF OBTAINING A LISTINGThere are three principle methods of obtaining a listi ng:

AN INTRODUCTIONThis is suitable where the company does not need to raise capital and has a suffi ciently wide public spread of shareholdings. It is the quickest and cheapest means of listi ng, as there is no off er to the public and minimum formaliti es are required.

A PRIVATE PLACINGFor a private listi ng, shares in the company are placed or off ered to prospecti ve shareholders through private negoti ati on. Usually this will be done through a sponsor or a investment bank.

A PUBLIC OFFERA public off er may be an off er for subscripti on or an off er for sale. In an off er for subscripti on, members of the public are invited to subscribe for unissued shares and the proceeds accrue to the company, while in an off er for sale, existi ng shareholders invite subscribers to purchase their shares and therefore the proceeds accrue to the shareholders.

This method requires the producti on of a prospectus which must be approved and registered with the Registrar of Companies. The public will have a certain period of ti me within which to submit their applicati ons and payment. The company will have to decide on the basis of allocati on if there is an oversubscripti on.

THE PROSPECTUS / INFORMATION MEMORANDUM When a company applies for a listi ng, it must produce an informati on memorandum containing certain prescribed informati on concerning the company, its business and its prospects. While the informati on memorandum may promoteinvestment in the company’s shares, it is not an invitati on to the public to subscribe for shares, but rather aimed at enabling potenti al investors to make an informed investment decision regarding the company’s shares. If the informati on memorandum contains a public off er, it will also have to comply with the prospectus provisions contained in the CMA Rules, USE Rules and the Companies Act.

Although the informati on memorandum/prospectus will largely be draft ed by the sponsoring stockbroker/investment adviser, the directors of the company accept full responsibility for the accuracy of its content.The main categories of informati on in the informati on memorandum are the following:General informati on regarding the company and its capital. Informati on regarding the directors and management of the company

and the company’s advisers. Informati on regarding the securiti es to be listed. Informati on on the company’s / group’s acti viti es. Informati on on the company’s fi nancial positi on and profi ts and losses.

THE TIMING OF THE LISTINGThe date of entering the market will largely be determined by the conditi on of the market and the state of the company. The USE may be stati c, rising or in decline, and it is generally more risky to list in a declining market. The company should be in a sound fi nancial positi on, with a good prospectus, and have the systems in place to comply with the USE’s fi nancial disclosure requirements.

THE ISSUE PRICE

Determining the correct price at which to issue shares is a delicate exercise that involves two stages:

ESTIMATED MARKET PRICEThere are various methods of valuing securiti es, including: the potenti al dividend yield; the price / earnings rati o;discounted cash fl ow analysis; andnet asset value.

Frequently one fi nds that combinati ons of the above and other methods are used in valuing the securiti es. When using certain of the above methods, the investor’s desired rate of return must be esti mated, and here cognizance must be taken of the returns provided by a listed share with a similar risk profi le within the sector or market that the company intends to list.

THE DISCOUNT TO MARKET PRICETo ensure a successful listi ng, the issue price should be fi xed at a reasonable discount (15% to 20%) to the esti mated market price. This provides an incenti ve for investors to prescribe and protects the company against a drop in share prices on the exchange. If the market price was correctly esti mated the share price should increase aft er listi ng which in itself generates further investors interest.

UNDERWRITING THE ISSUEAlthough it is not a requirement that an off er be underwritt en, an underwriti ng can have the following advantages: the company is assured of raising the desired amount of capital; and it creates a good impression if a prominent insti tuti on is prepared to

underwrite the off er.

DISCLAIMERThe above consti tutes summarized guidelines to the listi ng procedures of the Uganda Securiti es Exchange and potenti al issuers are encouraged to contact the Chief Executi ve for more informati on and/or interpretati ons on the listi ngs procedures/requirements, as each listi ng is evaluated independently on merit.

WHY SMES SHOULD EMBRACE UGANDA’S CAPITAL MARKETS AS A MEANS OF RAISING FUNDING