A new wave of reforms in East African capital markets is providing opportunities for companies to raise capital, and offering fresh revenues streams for market intermediaries.

As the region moves closer to integrating its capital markets, the bourses and capital markets regulators of Uganda, Kenya, Rwanda and Burundi have, over the past six months, embarked on reforms to lift the revenues of market intermediaries — stockbrokers and investment banks — whose incomes are heavily reliant on equities and bonds trading. 

The region is keen to connect brokers, bourses and central depositories, to create a path for a single platform that will result in a regional securities exchange.

Market players said the reforms, which are expected to gather speed in the remaining part of 2013, will, among other things, make it easier for investors to trade in the four bourses.

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The changes are also expected to open up the capital markets to new products such as futures trading, exchange traded funds and real estate investment trusts (Reits).

East African Securities Regulatory Authorities, the body that brings together capital market regulators in the region, is pushing for the regional rules for fixed income securities for the five member states to be adopted into their national law; Kenya is already in the process of domesticating the rules.

Once the law is domesticated, issuers from other member states will be able to get approval from their regulators to sell the same bonds in Kenya. When Tanzania, Uganda, Rwanda and Burundi domesticate the rules, Kenyan issuers will be able to tap into those markets.

The Dar es Salaam Securities Exchange (DSE), which is one of the youngest in the region having been established in 1998, announced that it has received two applications from companies interested in listing their shares on its yet to be established enterprise and growth market (EGM) segment.

The move follows a similar one by the Rwanda Stock Exchange (RSE), which last month indicated that it will soon launch the segment following the development of the rules targeted at smaller companies that want to list on the bourse.

Moremi Marwa, the chief executive officer of the DSE, said the new market segment will be launched after public awareness campaigns running this month. 

“There is a relatively high interest in this segment, and small and medium sized companies are asking about the rules, requirements and processes that they can deploy to raise capital and list on the exchange. So far, we have received two applications. We are in the process of evaluating them and we foresee receiving more applications,” said Mr Marwa.

An increased number of listings will provide the bourse with an additional source of income, helping it to become more profitable ahead of its demutualisation set for the 2016/17 financial year.

The Uganda Securities Exchange (USE) launched a growth and enterprise market segment (GEMS) in the first quarter of last year, though no company has listed on it. The Nairobi Securities Exchange (NSE) launched a similar segment in January this year, and in July had its first listing — Home Afrika.

READ: Home Afrika’s value more than doubles on NSE debut

Capital market regulators and other bourses in the region are spearheading initiatives to make the region attractive to investors who want to raise capital.

This includes changing their ownership structure to improve governance and make their operations more transparent.

The Nairobi bourse is in the process of demutualising — becoming a company that is limited by shares — a move that will put it at par with the Kigali bourse, which is 60 per cent owned by brokers, 20 per cent by the government of Rwanda, and 20 per cent by other shareholders.

NSE chief executive officer Peter Mwangi, last month said that issues surrounding the distribution of shares between other market intermediaries and the government have been resolved, paving way for the filing of change of ownership to complete the demutualisation.

“An amendment to the Act was made. This means that NSE is only entitled to issue 10 per cent to the Capital Markets Authority’s Investor Compensation Fund (ICF). We are now in the process of transferring the 5.1 per cent earlier issued to the Treasury back to ICF. The exchange will then become a demutualised exchange under the CMA,” Mr Mwangi said in an earlier interview.

In July, Kampala’s bourse advertised for a consultant to guide it through an overhaul of its rules and regulations made when the USE was established in 1998.

USE said the consultant would help review its current rules by the end of this year, enabling the bourse to demutualise and become a self-regulating organisation, introduce new products and adopt an automated trading system (ATS).

USE and RSE are the only bourses still using the open outcry system. The RSE is in the process of implementing an ATS.

The DSE, which is currently owned by members, is also preparing for demutualisation to help improve its corporate governance structure.

“Since July 2012, we have been implementing a five-year strategic plan to transform the DSE from a not-for profit organisation into a profit making entity, so that it becomes commercially attractive to potential investors,” said Mr Marwa.

He said that once the entity becomes profitable, private individuals and institutions will be allowed to subscribe to its shareholding, and once it meets the listing requirements either for the EGM or the main market board, then the listing process will begin. 

According to the latest financial statements, for the period ended June 2012, the DSE made a loss of Tsh338.84 million ($215,977), down from a surplus of Tsh359.54 million ($227,608) the previous year.

The government cut the support it had been giving to the bourse by 33.36 per cent to Tsh333.8 million ($212,759) as at the end of June 2012, from Tsh500.9 million ($317,093) at the end of June 2011.

It further listed Treasury bonds worth Tsh433 billion ($275.9 million) in the 2011/12 fiscal year, 53 per cent of the Tsh918 billion (581.1 million) listed in the previous fiscal year, affecting the bourse’s profitability.

Reforming the region’s bourses and regulatory framework is expected to increase their profitability and that of other market intermediaries such as central depositories, stockbrokers and investment banks.

New products

Listings are expected to increase and the market will be able to introduce new products such as real estate investment trusts, exchange traded funds and debt that has been collateralised by assets such as mortgages and other loans that are already being serviced, and revenues from projects such as road tolls.

Kenya’s Capital Markets Authority (CMA) has a Bill that is currently before the country’s parliament, to bring a raft of changes including giving the Authority the power to facilitate developments in the market, and introducing stringent rules to curb insider trading and create the framework for a futures market.

READ: New capital markets law to end rampant insider trading

Paul Muthaura, the acting chief executive officer of CMA, said regulations by Cabinet secretaries are subject to vetting by parliament and this can cause delays when new products need to be introduced into the market.

“We are hoping that this change in our approach to granting approvals and regulating new products will fast track new things to come. It is about market development and innovation,” said Mr Muthaura.

He said the new law will bring the country’s laws at par with other international markets, attract issuers, offer appropriate protection to investors, and allow for the introduction of more sophisticated products in the local market.