ZSE needs to be reformed to assist Entrepreneurs

By Gilbert Muponda




Zimbabwe’s current business operating environment characterized by hyper inflation discourages most lenders to lend capital due to fact that lenders lose value due to inflation .In hyper inflationary environment wealth is transferred from lenders to borrowers who only “repay” the amount that was agreed without adequate compensation the diminished value of currency due to inflation. This in turn results in lack of long term investments as most participants become short-term focused. In addition as a direct result investors would prefer ownership as shareholders and share in the upside of the business rather than just be paid interest which doesn’t fully compensate for inflation. This trend has forced Banks and other financial institutions to become major players on the Zimbabwe stock Exchange .The operating environment demands that various regulations and institutions be reformed and modernized to be better placed to deliver expected services to the nation.




The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), also referred to simply as a "public offering," is when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPO’s.




The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an elitist club into a more inclusive institution that transforms upcoming , promising ideas ,ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then the is an urgent need to set up a rival exchange to do that.




The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution.


The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. Among the requirements of conducting an I.P.O in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSE’s life easy and simple.


There global trends that ZSE can tap into an enhance both the quality and quantity of investment option available for investors. Specifically the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital.


Whilst it’s important to adhere to historic standards trends in other markets show the increased popularity of Black cheque IPOs. A blank check IPO exists to raise money, and then seeks to use that money to acquire another company. Blank check companies, also known as special purpose acquisition vehicles, are formed for the sole purpose of acquiring other businesses. They generally tap investors in the public markets prior to making acquisitions, and generally have an agreement to return funds to investors within a specified period if they fail to close deals.


Companies like to raise money first and decide what to do with it later. For investors, however, that can be tricky .Everybody wants a blank check. So-called blank check initial public offerings are in the midst of a renaissance, though they might not provide much of a thrill. In the Zimbabwean environment this can be particularly helpful when many businesses are closing down. A Blank cheque IPO can be very effective to acquire such businesses with a view to turn them around or merge them with other related businesses and create shareholder value in the process.


Unfortunately this very important task has been left only to parastatals and other government entities which have been burdened with acquiring enterprises which at times they can hardly add any value to. This role needs to be opened up to the private sector. And it has to encouraged by enabling legal instruments and a reformed and restructured ZSE which can facilitate such transactions. Blank cheque IPOs can fill in the void in terms of raising capital to acquire such businesses and reduce the burden on the fiscus.


A Special-purpose acquisition company (SPAC) is an investment vehicle that allows public investors to invest in areas sought by a management team or private equity firms. SPACs are shell or blank-check companies that have no operations but that go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).




The idea of investing in a company where you have no idea what the business will be is hardly new. During England's 18th Century South Sea Bubble, a promoter raised money through a stock offering for "a company for carrying on an undertaking of great advantage, but nobody is to know what it is."




Sometimes companies that go public through this process can be good investments, but there's something investors need to keep in mind: A company that has been acquired by a SPAC has just been put up for sale and is therefore unlikely to be undervalued. If the sellers could have gotten more for it, they would have sold it to someone else.




Blank check companies, which have only come into main stream in recent years, have courted controversy because they have no revenue or operating history -- just a management team promising acquisitions if the right opportunity presents itself. This sounds speculative but if you are an informed investor in Zimbabwe you will be able to assess for your self the chances of such opportunities arising.




Investors who buy into blank checks are in effect betting on the experience, skills and resumes of the managers and their ability to find suitable businesses to acquire. In Zimbabwe opportunities exist for such transactions due to the high company closure or re-location rate. It maybe about time institutions such as the ZSE are reformed and modernized to keep pace with other markets.



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