Funding Business Growth In Uganda Through Public Offers In The Capital Markets

Funding Business Growth In Uganda Through Public Offers In The Capital Markets

The Ugandan economy has been thriving for the last 4 decades, driven by sound macro-economic policies under the National Resistance Movement. This has created a high demand for capital as businesses seek to expand in order to take advantage of the high aggregate demand in the economy. The third National Development Plan rightly observes that limited access to and high cost of capital are constraints to the growth of business enterprises in Uganda. Interventions have been proposed to increase access to and lower the cost of capital, by mobilizing savings for deployment, as long-term capital for the real economy through the capital markets. Capital markets provide a platform for the Government and the private sector to raise patient long-term capital that has been mobilized through the savings of Ugandans.     

In this article, I will be looking at public offers as a panacea to the lack of access to capital, the merits & demerits of public offers and key considerations for business owners around readiness, before making the decision to tap into public offers.      

So what constitutes a public offer? Public offers involve selling securities such as shares (equities) or corporate bonds (loans to a company) to raise capital. This process in Uganda is governed by the Capital Markets Authority (CMA) Act, under Section 90.A-90.AE. This part of the Act lays out the requirements for any business owner seeking to offer securities to the public in a manner that is not only facilitative to an issuer, but also protective to the investing public.  The offer of securities to the public is also governed by the Capital Markets Authority (Prospectus Requirements) regulations that highlight the necessary disclosures with respect to public offers.

By raising capital through an offer of securities to the public, a business owner stands to benefit in several ways. Firstly, a business owner is able to raise capital from a wide pool of investors, which increases the likelihood of successfully raising a huge amount of money as capital. The widening of the investor pool not only aids in spreading the business risk but also diversifying ownership (in the case of an offer of equity) beyond the business owner or founder. Offering securities such as shares (equity) to the public comes with obligations such as compliance with Table F of the Companies Act on corporate governance for public companies and corporate governance guidelines issued by CMA that focus on listed companies. Sound corporate governance practices are critical in the creation of value for stakeholders and creating confidence to allow for future capital raising. Where a company makes an offer to the public and then goes on to list on a securities exchange, the holder of securities can benefit from liquidity (the ability to sell an asset easily and generate cash) and the price discovery mechanism that is provided by listing on a securities exchange. Listing on a stock exchange allows prices to be determined transparently and with a lot more accuracy.

On the other side, what are some of the disadvantages that come with offering securities to the public? For a company that has offered securities to the public, there are regulatory requirements such as corporate governance and continuous disclosure provisions that it has to fulfil. These come at an additional cost to the company. However, I believe that the benefits of complying with regulatory requirements in creating value for shareholders far outweigh the costs. With majority of Ugandan businesses being family owned, there is always fear around the loss of control that could be occasioned by offering securities (specifically shares) to the public. This fear can however be easily mitigated by ensuring that a business owner retains majority shareholding to ensure control over their business once it offers securities to the public. Concerns have been raised around disclosure requirements that some business owners consider intrusive and likely to expose business secrets to competitors. However, business owners should take comfort in the fact that the disclosure requirements do not require the revelation of business secrets. The bulk of disclosure requirements rotate around financial reporting, critical in assessing the growth potential of a company on the part of investors.

The question that I sense is on the minds of readers of this article is what are the tale-tale signs that a company is ready to access market based financing through a public offer? Business owners should consider if a public offer of securities is in line with their objectives, and if so, this fundraising approach can apply. Additionally, a business owner should be able to ask whether a business has a solid record in terms of financial performance, a sound industry position and high growth potential. These are usually some of the major considerations that providers of capital lookout for before deploying their capital.  Sound corporate governance is also a key question that should be posed by business owners as they consider the public offer route. Finally, the business owner should fully appreciate the advantages and drawbacks of raising patient capital through public offers.

As we put our minds to meeting His Excellency the President’s vision of expanding Uganda’s economy 10-fold, we do believe that public offers have a place in realizing the vision. Alternative patient capital can be tapped to fund expansion, which will lead to the creation of employment, boost the standards of living for our people, ensure prosperity for all Ugandans and ultimately meet the goals under Uganda’s national development blueprint, Vision 2040. 

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