HomeBusiness DigestA case for a secondary bourse in Zimbabwe

A case for a secondary bourse in Zimbabwe

In a study done by Grant Thornton of the United Kingdom (UK) on the economic impact of Alternative Investments Markets (AIM) and the role of fiscal incentives, it was revealed that the secondary bourse has supported the growth of more than 3 100 companies since its inception in 1995 and enabled over US$110bn of capital to be raised.

The AIM, the secondary bourse to the London Stock Exchange, has significantly contributed to gross domestic product (GDP) and tax revenue of the UK in the period 1995 to 2009 with levels well above Zimbabwe’s current GDP levels.

“This has delivered significant economic benefits to the UK economy. In 2009, UK-incorporated AIM companies employed more than 250 000 full-time equivalent employees, contributed US19,4bn in GDP to the UK economy and contributed US$2,9 bn of tax revenues to the Exchequer,” said Grant Thornton.

The study indicated that from additional supply chains and wider multiplier impacts, a further 320 000 jobs and US$15,4 bn of GDP were indirectly supported and the level of employment in 2009 was larger than that of the UK pharmaceuticals or defence industries.

In Zimbabwe’s case, the economy, which is still in a recovery mode, is expected to grow by 9,4% to US$11,9 bn in 2012.

Analysts say the introduction of a secondary bourse will definitely see small-to-medium enterprises (SMEs) contributing significantly to the fiscus given that activities of most SMEs are informal and unaccounted for.

Upon listing, viable and profitable SMEs can raise capital and expand business and this can impact on economic contribution through higher employment levels and higher output.

The Grant Thornton study highlighted that AIM companies have raisedUS$54,1bn of capital at admission and followed this with further fund raising amounting to US$56,86 bn, demonstrating the important role of AIM in supporting growth after admission to the market.
“Companies admitted to the AIM experience an immediate growth spurt, with turnover having increased by an average of 37% and 25% in the first and second years respectively,” the study noted.

Benefits of a secondary bourse include access to capital, knowledge, productivity improvements, job creation, access to expert adviser network and also ownership transition and exit strategy. In Zimbabwe, companies listed on the London’s AIM (Alternative Investment Market) companies include Masawara Plc, Mwana Africa, Lonrho Plc which  all have various investments locally have benefited from access to capital from the UK secondary exchange.

Last year Masawara Plc raised US$50 million equity capital which it applied towards acquisition of new assets in Zimbabwe, which include assets of BP Shell Zimbabwe. At its initial public offering, Masawara raised US$25 million, after Neil Woodford – who manages US$15-billion worth of investments for the UK’s Invesco – bought 25,5% shareholding in Masawara.

Masawara Plc then followed this up with a private placement which raised US$23 million.

Lonrho Plc is focused on investing in and developing opportunities across Africa, where it operates five strategic divisions in seventeen countries.

Mwana Africa PLC is a pan-African resources company with operations in Zimbabwe and South Africa and operates a broad range of exploration projects and interests in the Democratic Republic of Congo (DRC), Angola, Ghana and Botswana. The group has a diverse asset base which includes gold, nickel, copper, cobalt and diamonds.

Judging by indications from local brokers, the secondary bourse could list companies with a market capitalisation of less than US$1 million and this means that listed companies on the main bourse, the Zimbabwe Stock Exchange (ZSE), will be demoted to the second tier exchange if their capitalisation levels fall below the threshold.

But modalities of promotion and demotion have to be expertly developed, given the current under performance of the ZSE.

Government will also need to support the secondary bourse by crafting fiscal incentives which can act as a package of measures which address persistent market failures and barriers which restrict access to capital, such as asymmetric and imperfect information, illiquidity of assets and transaction costs.

Venture capital trust funds could be introduced and be allowed to participate in the secondary market and this could stimulate investor appetite for smaller companies in the primary sector since venture capital trust funds may invest in a wider pool of SMEs, making these trust funds more attractive investors.

Other incentives include a favourable capital gains tax regime for investing SMEs to attract investors, improved liquidity and making secondary securities tradable in the market as security to broaden the investor base and market liquidity.

As for London’s AIM, fiscal incentives have led to funds raised of more than US$7,4bn over the past five years and are eligible to investors in 35% of AIM companies.

“Without such incentives, many AIM companies would suffer reduced investment or would not have been able to raise capital on AIM in the first place. In the absence of the incentives, liquidity would be lower, and delivery of the economic benefits would be put at risk,” said Grant Thornton.

Success stories of secondary bourses are evident in emerging markets, especially in Asia where South Korea, China, India, Indonesia and Japan have seen their SMEs sectors grow rapidly after deliberately adopting policies which support these leading to significant economic growth.

In the UK, the AIM has stimulated innovation, enterprise and productivity.

“SMEs are twice as likely to innovate, account for 40% of live patents and are often owned by entrepreneurs.

“Such innovation and enterprise creates spillover benefits as new knowledge, technology and skills are transferred to other industries, raising the level of productivity across the UK economy,” said Grant Thornton.

The current problems impeding the ZSE are also most likely to impact on a secondary bourse.

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