Zimbabwe needs a Developmental Exchange

By Gilbert Muponda
The Zimbabwe Stock Exchange (ZSE) needs to actively attract small to medium enterprises to raise capital through listing on the ZSE .This can be done through setting up of a developmental section of the exchange which will allow smaller firms to raise capital to fund their expansion whilst their prepare to list on the main market. The London exchange and the Johannesburg exchanges use a similar model which has served to prepare listing candidates before they graduate to the main market. The London Stock exchange’s developmental section is separately regulated and is called Alternative Investment Market (AIM)

AIM is a sub-market/(developmental stage section) of the London Stock Exchange, allowing smaller companies to list their shares with a more flexible regulatory system than is applicable to the London Stock Exchange’s main market. It attracts firms from all over the world .This allows the companies to raise both capital and their profile on a global scale. A higher public profile makes it easier to access certain markets and to network in critical areas as well as attract talent and other critical resources.

AIM is regulated through an array of principles-based rules for publicly held companies. AIM’s regulatory model is based on a comply-or-explain option that lets each company listed on AIM either comply with AIMs relatively few rules, or explain why it has decided not to comply with them. Aside from granting companies some leeway in regards to regulatory compliance, the exchange also mandates continuous oversight and advice by the issuer's underwriter, referred to as a Nominated Adviser. This ensures that firms adhere to some minimal standards to protect the investors and the reputation of the exchange. In Zimbabwe and the rest of Africa an exchange like that is desirable as it can serve to encourage more listings and encourage the general public to be more involved in investment matters which are currently restricted to the elite.

There is a clear need to encourage small firms and businesses since they employ an increased number of people in recent times. In Zimbabwe’s case given that a reported 80% of the population is out side the formal employment system means a significant number is self-employed in operations which have potential to employ more people if given adequate financial and technical support. A developmental exchange can play a leading role in facilitating the growth of that sector.

Self-regulation is pivotal to a developmental exchange’s low regulatory burden: companies seeking a developmental exchange listing are not subject to significant admission requirements; after admission is granted, firms must comply with ongoing obligations which are comparatively lower to the ones that govern the operation of larger exchanges; and certain corporate governance provisions are not mandatory for developmental exchange companies. Developmental exchange-listed companies usually are only required to adhere to the corporate governance requirements of their home jurisdiction, which, as a practical matter, vary widely.

Even though AIM-listed companies are not start-ups, most are small and highly risky. This is viewed in capital markets as hazardous for unsophisticated investors who normally lack both the knowledge and resources to conduct proper inquiries and analysis into a listed firm’s prospects and activities. This limits the involvement of the general public in trading developmental stage listed shares. This presents both a challenge and opportunity to the stock broking community.

In countries such as Kenya, South Africa AND Zimbabwe which have relatively developed stock broking communities the task of developing such markets is not beyond their capacity. What maybe be lacking is the legal framework that would allow the full development of such markets. The benefits to the national economy are significant since this process will allow smaller businesses to expand into solid firms that employ more and can access funding to finance critical activities such as research and development to keep pace with the rest of the world.

Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at gilbert@gmricapital.com .This article appears courtesy of GMRI Capital. More articles at http://www.gmricapital.com/