Tanzania Breweries share sale exposes challenges of investing in EA equities
Tanzania Breweries Limited share issue ended last week.file
Equity investors looking to put their money into companies selling their shares in East Africa were for the fifth time this year given another opportunity through the Tanzania Breweries Limited (TBL) share issue, which came to a close last week.
The share offer, in which the East African Breweries Limited was seeking to sell 58.99 million shares amounting to 20 per cent of the company through the Dar es Salaam Stock Exchange (DSE) came just after Precision Air concluded its 58.84 million shares sale at the Tanzania bourse. (READ: TBL share sale seen hitting target)
Both share offers have however brought to the fore some of the many challenges that investors face as they seek gains to be made through new and already listed equities in the four countries which have stock exchanges.
International investors and those from Kenya, Tanzania, Uganda and Rwanda are faced with different legal environments in each market whose combined turnover is very small when compared to other world markets.
Technical and procedural restrictions also make it time consuming and cumbersome when trading in equities, adding to the illiquidity of shares creating a negative perception of investing in the region.
Stockbrokers and analyst are now saying that there is a need for the harmonisation of legal frameworks and trading platforms to make the trading environment more investor friendly.
Each of the five East African countries have different rules governing the trading and ownership of equity securities, with the maximum participation by foreign investors in listed companies being capped at 60 per cent in Tanzania, 75 per cent in Kenya while it is 100 per cent Uganda and Rwanda.
Burundi is the only country that does not have a stock exchange though trading in equity and fixed income securities is conducted at a special desk within the Central Bank of Burundi.
Tanzania rules are the most restrictive while Rwanda and Uganda, which are the most liberal, having no foreign investor restrictions on the ownership of listed securities.
At the Dar es Salaam bourse, the rules are such that if an investor wants to sell equities and the cap has been reached, the investor must sell to a Tanzanian citizen.
“Each exchange operates in its unique legal environment. DSE rules have no relation to the NSE, USE or RSE. It however potentially limits participation of East Africans in DSE listed equities,” said Joseph Kitamirike, Uganda Securities Exchange (USE) chief executive officer.
In the case of TBL, the total shareholding by foreign investors, excluding EABL’s 20 per cent, prior to the share offer totalled 56.64 per cent.
According to the share issue prospectus if foreign investors, including Kenyans, Ugandans, Rwandans and Burundians acquired 3.36 per cent of the shares on sale, the sale to Tanzania citizens rule would kick in.
Mr Kitamirike, who is also the chairman of the East African Securities Exchanges Association (EASEA), said the restriction is a way for Tanzania to enforce its capital account rules and that the country needs to liberalise its capital account. “Once it does so, these rules will automatically fall away,” he said.
TBL, whose shares in the secondary IPO were priced at Tsh2,060 was selling at Tsh2,020 in the market on the last day of the secondary share sale. Though EABL was selling the shares at a 12.4 per cent premium as compared to the prior three months average price, the restrictions in Tanzania could have been another reason why the market price did not climb above or get close to the secondary IPO price.
Rwanda appears to have the most liberal stock ownership rules but restrictions have been placed on foreigners, including other East African citizens during share issues that have had a very high demand, as was the case with its brewer Bralirwa which listed its shares early this year at the Rwanda Stock Exchange (RSE).
“Other than Kenya, other East African countries do not recognise East African nationals as ‘local investors’ and they are therefore subject to the caps on foreign investors,” said Patrick Mweheire, chief executive officer, Renaissance Capital.
He said that all East Africa nationals should all be treated as ‘local investors’ when trading in any of the East African markets adding that no preference should be given to nationals of one country over other East African nationals.
Mr Mweheire said that Tanzania also has currency restrictions which affect investors who would wish to repatriate their investment returns and that because of these restrictions on foreign investors and restrictions on currency movement, few investors are attracted to the East African markets, which also affects liquidity of shares.
Apart from the legal restrictions, investors must also open up different electronic accounts in Kenya, Uganda, Rwanda and Tanzania even if they are trading in cross listed equities because there is no central depository for the entire region. Investors from the region who have put their money in cross border older share issues like Safaricom and Stanbic Bank Uganda also had to open electronic share accounts in the respective countries where the shares were being sold.
Kenya’s Central Depository and Settlement Corporation (CDSC) is running Rwanda’s central depository under a separate company but investors who want to trade Nation Media Group (NMG) and KCB Group shares, which were cross listed in 2009 and 2010 respectively at the RSE must have different electronic share accounts in each market.
Both of these counters make fewer daily trades at the Kigali bourse and buyers and sellers are easier to find at the Nairobi bourse.
“An investor would have to convert the shares back to paper form and then immobilise the shares again if intending to trade across countries,” said Mr Mweheire who added that in addition to this, not all shares of listed companies have been deposited in the respective electronic systems.
He said that the lack of a common central depository system amongst the East African countries means that shares are not readily available for trading across countries.
Having shares in paper form creates delays for an investor where they are yet to be immobilised resulting in shares that are stuck at very high or very low prices compared to their fundamental value due to illiquidity in the markets, said Mr Mweheire.
The story is the same at the USE has 14 listed firms, half of which are cross listings from Kenya. It is easier to find a seller or a buyer of equities for East African Breweries, Jubilee, Kenya Airways (KQ), NMG, Centum and Equity and KCB Bank shares which are listed at the Nairobi Securities Exchange (NSE).
At the DSE, which has 15 listed firms, NMG, KCB, Jubilee, EABL and KQ are cross listed from the NSE but the five counters are more liquid at the Nairobi bourse than at Dar es Salaam.
“We should harmonise our market and have a single trading platform that will link all exchanges in the region and avoid multiple electronic accounts,” said Godfrey Gabriel an investment and research officer at Orbit Securities Company in Tanzania.
Mr Gabriel said that each exchange operates independently with different laws and procedures and in so doing investors encounter challenges when investing or trading across East Africa Region. “We as an association of exchanges are beginning to evaluate the possibility of using depository receipts to facilitate cross border transactions. If we go in that direction we shall need to have the depositories,” said Mr Kitamirike, EASEA chairman.
It is not yet clear how depository receipts, which represent a foreign company’s shares in a market, would work in the region. He said that the regions stock exchanges have been looking into the possibility of creating a regional stock exchange and the “conceptual issues” relating to the definition of an integrated securities market have been under discussion.
Part of the “conceptual issues” stem from the fact that that there are groups who favour separate country markets that are linked, others who favour the creation of a single regional exchange which would compete with existing ones and then others who want to see a merger of the existing exchange operating companies.
“Once we overcome the conceptual hurdles we should be able to define clearly what the market will look like,” he said, adding that a timeline for the process has not yet been established. While Kenyan companies have cross listed in Uganda, Tanzania and Rwanda, no companies from the other three countries have cross-listed in Nairobi.
