Does USE really need cross-lists?

By Faridah Kulabako

 

THE past five years have seen a number of Kenyan listed firms aggressively enter the Ugandan market prompted by investors’ growing appetite to invest in shares beyond the boundaries of one’s home country.

 

As a result, eight of the 16 listed companies on the Uganda Securities Exchange (USE) are cross-lists.

 

These include East African Breweries Limited, Kenya Airways, Nation Media Group, Kenya Commercial Bank, Centum Investment Company Limited, Jubilee Holdings Limited, Uchumi and Equity Bank Limited.

 

Firms cross-list shares on other markets to, among others, afford accessibility of the stock to investors. It is also used it as a marketing tool for the cross-listed companies to increase brand visibility.

 

It should, however, be noted that for the case of firms cross-listed on the USE, the latter has been fully maximised, but the former still seems to be challenged.

 

An analysis of the performance of cross-listed stocks shows that not more than three, out of the eight, which are cross-listed on USE, traded shares on the bourse last year.

 

It is only Centum, Uchumi and Equity Bank that managed to trade once in a while during the year, while East African Breweries Limited, Kenya Air ways, Nation Media Group, Kenya Commercial Bank and Jubilee Holdings posted no activity throughout the year. Even for those which traded, it was always a struggle.

 

For instance, Centum traded once in October when 1,176 shares worth sh2.04m exchanged hands on its counter on October 29, 2014.

 

July and August were the busiest months for cross-listed companies during the year when two stocks —Centum, Uchumi and Equity traded at least twice during the period.

 

Centum sold 2,898 shares on August 13, 2014, valued at sh3.5m and 2,240 shares valued at sh27.7m traded on the same counter on August 14, 2014. Equity traded 12,147 shares worth sh15.3m on August 7.

 

On July 2, Centum traded 681 shares worth sh1.18m while Uchumi traded 2,500 shares valued at sh950,000 and 3,200 shares worth sh1.18m on July 14 and 15, respectively.

 

This year, its only Centum that traded thrice during the month, while no cross-listed counter posted activity in February, March, April, May, June, September, November and December, 2014.

 

It should also be noted that some firms last posted trading on their counters when they were cross-listing.

 

Since then, trading has only been taking place in the primary market and this is the only reason there are price movements.

 

Capital Markets Authority communications and public relations manager Charles Nsamba blamed the minimal activity on crosslisted stock counters on bottlenecks associated with trading such stocks including variances in currencies that pose foreign exchange rate risks and the cumbersome processes of clearing and settling a cross-border transactions.

 

Apart from Centum, Uchumi and KCB, all the other firms did not bring physical shares on the bourse.

 

Nsamba, however, urged cross-listed companies to provide physical shares so as to facilitate trading in cross-listed stocks.

 

Arthur Nsiko, African Alliance Research analyst noted that it is common for cross-listed stocks not to trade much in a secondary markets as most institutional investors prefer to trade on the primary market of the stock.

 

“At the moment, the negatives of cross-lists outweigh the positives, but we are moving towards a level where the market will benefit from them,” Nsiko said.

 

The positives, as earlier said, are to offer accessibility of the stock to local investors and be a marketing tool for the cross-listed company to increase brand visibility, but also boost liquidity of the bourse.

 

Nsiko added that the biggest challenge to trading cross-listed stocks in Uganda is the lack of an electronic system that would allow timely clearance of cross border securities transactions, re-ignite activity on cross-listed counters and boost traded volumes.

 

“It takes about two weeks to transfer a stock from USE to NSE and by the time this is done, the share price could have changed. The solution to this is automation because it will facilitate faster transfer of shares,” he said.

 

Investors tend to trade where markets are fastest, most efficient and cheapest.

 

However, the East African capital markets regulators through their umbrella body — the East African Securities Regulatory Authorities (EASRA), are spearheading the process of interlinking regional bourses through information technology (ICT) infrastructure to eliminate the bottlenecks and facilitate smooth trading of stocks across borders.

 

It had been anticipated that the inter-linkage would take place last year (2014), but the process was stalled.

 

However, Nsamba said regional capital markets regulators and consultants are in the final evaluation process of a company that will provide the interlinking infrastructure to facilitate trading and timely settlement of cross border transactions.

 

The successful bidder is expected to be announced by mid this year. Interlinking the bourses alone is not enough to boost trading of cross-listed stocks. There is also need to align the regulatory frameworks in all East African partner states, something that regulators are also undertaking.

 

Despite the poor performance of cross-listed stocks in the Uganda market, the Umeme stock, the only firm cross-listed from USE to NSE is performing well.

 

And despite the stock retailing at sh505 per share on USE, the price on NSE is sh621.

 

Nsiko attributes this scenario to high demand against relatively fewer shares on sell, unlike in Uganda where supply is slightly higher than demand.

 

He further notes that although NIC is expected to cross-list on NSE sometime next year, the local bourse should not expect any cross-lists from NSE because, according to him, there is not much value apart from publicity.

 

“Cross-lists will gain momentum, but not to the extent of locally listed companies because a stock trades mostly where it is primarily listed,” he said.