Approval to list shares cannot be compromised-CMA

By Charles Nsamba

Last year, the Speaker of Parliament named a select committee to investigate the alleged mismanagement of the National Social Security Fund and among the issues was the alleged illegal purchase of shares in Umeme.

Umeme is a public listed company on the Uganda Securities Exchange (USE), and the only Ugandan cross listed company on the Nairobi Securities Exchange.

The Committee, on conclusion of its work, tabled the report for debate and subsequently, Parliament adopted it.

The report findings among others implicate the Capital Markets Authority, the regulator of the capital markets in Uganda for neglecting its duty in the approval process.

The report alleges that CMA failed to ensure worker’s savings were securely invested. Based on that, the Committee recommended that the Board and Management of the Authority be reprimanded for what they termed as “complacency”.

One of CMA’s core functions is protection of investor interests. In executing this role, CMA ensures at most attention to all material issues before approving any issuance of shares, as prescribed under the CMA Act.

The Authority approves all offers for the sale of shares to the public as prescribed in section 90 E(1) of the CMA Act (as amended in 2011).

CMA also licenses and regularly inspects other players involved in shares trading including securities exchanges (where the trading takes place), as well as brokers who are responsible for leading public offers and facilitating the trading in securities on the exchanges.

Does CMA undertake due diligence before a company is allowed to list?

CMA Uganda, like most capital markets regulatory authorities who are members of the International Organisation of Securities Commissions is a disclosure based regulator as opposed to a merit based regulator.

This means that during the prospectus approval process, CMA checks for full disclosure of all matters considered material for investors to make an informed investment decision on whether or not to invest in a company seeking to diversify its shareholder base (and raise capital in the process).

CMA’s Prospectus Regulations of 1996 demand for the submission of a detailed prospectus and specifies what must be contained in a prospectus at a minimum.

A prospectus (the legal document that provides details about an investment offering for sale to the public), among other details contains salient features of the company and the public offer (amount to be raised, number of shares, use of proceeds from the public offer, dates and timelines, the share buying process and other pertinent details); A more detailed overview of the company within the context of the industry in which it exists and its regulatory framework if any; risks facing the company and mitigation measures adopted by the company where these have been considered; the reporting accountant’s report confirming the historical financial forecasts and the accountant’s view on the company’s profit forecasts; the legal opinion regarding the company (any material litigation that could affect the value of the company, whether there is any winding up action against the company, whether the company is duly registered etc.); and other general information regarding the offer which includes material agreements the company has entered into, licenses the company holds. Short of these, an approval cannot be granted.

CMA has checked for these and more in ALL approvals granted for ALL companies listed on the USE to date, and short of any of these, approval cannot be granted.

The Authority always cautions investors that approval of the prospectus is not to be taken as an indication of the merits of the company or its shares.

This therefore requires investors to undertake further due diligence into the merits of an investment into a listed company-with help from licensed investment advisors based on all disclosures made. A merit based regulator would be expected to undertake a full scope due diligence - technical, commercial / financial and legal, and investors would place a lot more reliance on this work when making investment decisions.

This however, would not be prudent as it would essentially transfer investment risk to the financial markets regulator and create moral hazard where investors would no longer take any responsibility for their decisions. But the Authority provides additional structures to ensure that full disclosure is an ongoing process.

The Uganda Securities Exchange also has detailed listing rules. Part VI of the USE rules lists the continuous listing obligations of a listed company.

These include periodic disclosure of financial information and other information that could have a material effect on the price of the company’s shares, driven by planned acquisitions, disposals, substantial change in shareholding, and changes in directorships.

All this is evidence that the investor protection mandate is paramount and the Authority treats it as such, regardless of the nature of approval. 

The writer is the communication and public relations manager of Capital Markets Authority