CF601 Corporate Finance

7/26/2019 CF601 Corporate Finance

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Executive Summary

Starting from the 1980s, the economic globalization has become an

irresistible historical trend. The expansion of multinational corporations, as

the forerunner in this process, has been presenting a continued

momentum. This paper serves as an effort to analyze the nature and

operations of the stoc exchange in !ambia and ho" it could help in the

development of the economy.

# stoc exchange is an organization, usually a corporation, "hich brings

together stoc broers and traders by giving them facilities to carry out

trading of stocs, other securities and other financial instruments. $or

example, thin of a maret building and "hat you see inside. %ou see

sections. &ach section's facilities define "hom it caters to. The fresh meat

and fresh fish sections have large freezers for storing ra" meat( the

produce section has coolers and display cases( the dry goods section has

stoc shelves for displaying items. )eople come to this place to buy and

sell food items. # stoc exchange is basically that. #lthough its sections,

called marets, are not trading physically transferable goods and the

marets per se are essentially not physically present "ithin the building, a

stoc exchange is a virtual maretplace "here sellers *issuing corporations

or organizations+ and buyers *traders+ do their business.

ut unlie ordinary maretplace, the prominent persons in a stocexchange are middlemen called stoc broers. They are regulated

professionals "ho do the buying and selling of securities on behalf of

investors.

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The capital maret is important to a country-s economic and social system.

t plays the crucial roles of raising capital for public and private sectors,

promoting balance and stability in the financial system, decreasing

dependency on the baning sector, driving the economy for"ard and

creating /obs, as "ell as being an alternative method for savings. # strong

capital maret "ill lessen the impact of economic fluctuations "hich can be

compounded by the fastflo"ing nature of capital.

Introduction



The 2usaa Stoc &xchange *2uS&+ began operations in $ebruary 1993.

ts formation "as directly lined to the economic reforms and liberalization

of the !ambian economy that began in 1991, a ey feature of "hich "as

the privatization of stateo"ned enterprises. # stoc exchange "as vie"ed

as pivotal to the success of the privatization program "hich "as also

intended to facilitate foreign investment. The securities maret in !ambia

"as formalized by the enactment of the Securities #ct in 4ecember 1995.

The Securities #ct, and its subsidiary legislation in the form of rules,

provides for the operation of a maret that is fair, orderly, secure, and

transparent. t provides for investor protection and the licensing of all

maret players. The #ct also provides for the establishment of the

Securities and &xchange 6ommission *S&6!ambia+ as the regulatory

agency for the !ambian securities maret. 2uS& is also a self regulatory

organization *S7+ "hich creates rules for its members, listed companies

and for trading.

The 2uS& is incorporated as a private limited liability company o"ned by

the broer members. To participate in the !ambian securities maret, the

first reuirement is to incorporate as a company and thereafter to apply to

the S&6 for ualification to be a licensed dealer. 2icensed dealers are

ualified to provide financial advisory services to issuers and investors. To

buy or sell securities on behalf of clients *secondary maret trading+,

licensed dealers apply for admission into membership of the 2uS& and

thereby become formalized as stoc broers. The 2uS& is therefore a

broerdealer maret "hereby broer members have dual capacity roles,

acting as agents *broers+ as "ell being ualified to act as principals

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*dealers+ for their o"n accounts. The #rticles of the 2uS& had provided for

a board of eight directors of "hich six directors "ere from the broer

members and the other t"o directors separately represented the public and

the listed companies respectively. :o"ever, in line "ith good corporate

governance practices 2uS& broadened its board by allo"ing for t"o more

independent directors. The 2uS& is licensed by the S&6!ambia and also

has membership, trading, clearing and settlement rules. The &xchange in

00; introduced a 6orporate <overnance 6ode for listed and uoted

companies.

2uS& operates a unified maret dealing in both euity and debt. The euity

maret has t"o tiers = the listed or main board, and the uoted or second

tier maret. 6urrently, upon successful registration of euity securities "ith

the Securities and &xchange 6ommission !ambia, the company is

automatically uoted. 7egistration of securities is a legal reuirement

"hereas listing is a matter of contract bet"een the company and the

&xchange To list, a company has to satisfy the 2uS& 2isting 7euirements"hich are mostly harmonized "ith those obtaining in the S#46 region. The

2isting 7euirements specify the minimum free float, number of public

shareholders, profitability period, prescribed share capita and number of

shares in issue. 4etails of these reuirements and rules are available from

the &xchange. To promote listing the <overnment has established tax

incentives that only apply to listed companies and stocs. The debt or

bond maret deals "ith primary issuance and secondary trading of

corporate bonds. 2uS& is the sole secondary maret for <overnment

bonds.

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The 2uS& automated in >ovember 008 and no" trades continuously from

11?00 to 13?00 hrs

Regulatory framework

The Stoc maret in !ambia is regulated by the Securities &xchange #ct

"hich also led to the formation of the Securities &xchange 6ommission of

!ambia. Some of the provisions of this #ct are that(

*i+ &very stoc maret should be registered as a Stoc exchange "ith the

Securities &xchange 6ommission.

*ii+ &very member of the Stoc exchange must be registered "ith the

Securities &xchange 6ommission.

*iii+ # compensation fund must be established to refund investors "ho incur

losses due to fraudulent acts by registered members of the Stoc

exchange. This provision is aimed at increasing investor confidence in the

stoc maret as anyone defrauded may have the assurance of having their

funds bac.

*iv+ @embers of the stoc maret are not supposed to engage in insider

trading or fraudulent acts.

How trading takes place

*i+ pen a Share #ccount "ith a 2usaa Stoc &xchange *2uS&+

Stoc roer

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• Select a broer of your choice from the list at the bac and fill in

an email application form to open your share account. Apon

receipt of your email application form, the 2usaa Stoc

&xchange *2uS&+ roer should send you a note to confirm

that your share account has been opened at the 6entral

Share 4epository B6S4C of the 2usaa Stoc &xchange *2uS&+.

• The roer "ill also advise you of your share account number.

• # copy of your application form "ill be sent to the 2usaa Stoc

&xchange *2uS&+ by your broer for verification and recording.

• Transfer money from your an to your roer to facilitate the

uying of Shares on the 2usaa Stoc &xchange *2uS&+

• nvestors can easily transfer money to their appointed broer

"ith instructions to purchase shares on the 2usaa Stoc

&xchange *2uS&+.

Custodian Banks (Alternative ption for Investors A!road+

6ustodian bans provide safe custody of funds and securities for both

domestic and investors abroad. The 2usaa Stoc &xchange *2uS&+ has

t"o custodian bans, namely arclays an !ambia 2td and Stanbic

!ambia 2td.

The custodian ban receives instructions from the client Binvestor abroadC

and executes these in the domestic maret. $or a buying transaction, the

custodian ban "ill receive the funds from the investor abroad.

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The custodian "ill then monitor the entire transaction, and release funds

"hen the buy order has successfully been traded, cleared and settled on

the 2usaa Stoc &xchange *2uS&+. #fter settlement, the custodian may Bif

the client reuestsC proceed to hold the shares in a custodian subaccount

in the 6S4 of the 2usaa Stoc &xchange *2uS&+, on behalf of the investor

abroad. The contact details for the 2usaa Stoc &xchange *2uS&+

custodians are sho"n at the bac.

• !tain a Contract "ote from your Broker

nce your order to buy or sell has been traded *matched+ at the stoc

exchange, the 2usaa Stoc &xchange *2uS&+ produces a trade

confirmation report to your broer. %our broer is then reuired, under

the Securities #ct, to issue you a 6ontract >ote "ithin 3 hours. The

contract note is the legal confirmation of the transaction. %ou should

therefore receive an email contract note from your broer to confirm

that your buy or sell order has been matched on the 2usaa Stoc

&xchange *2uS&+ and that the transaction "ill be irrevocably settled "ith

finality 5 days after the trade *TE5+.

6ontract notes should be filed and ept under the safe custody, as they

are legal proof of the transaction.

Settlement

5 days after the trade, termed TE5, *excluding "eeends and holidays+, the

matched trades are settled by the 2usaa Stoc &xchange *2uS&+ 6entral

Share 4epository *6S4+. This settlement involves t"o simultaneous steps

= the movement of money *payment+ from the buyer to the seller and the

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movement of shares BdeliveryC from the seller to the buyer. This is termed

4elivery versus )ayment.

Settlement is run every day on the 2usaa Stoc &xchange *2uS&+ at

09?00 hours and completed by 11?00 hours, the broers *seller-s side+

receive money for all shares sold "hilst the buyers receive the shares

purchased as boo entry credits to their share accounts in the 6S4.

roers are therefore in a position to pass on the money from the sale

proceeds, to their clients the same day on TE5 "hen settlement is run.

Selling S#ares

The procedure for selling shares is similar to that for buying shares as

described above. To sell shares you should send an instruction to your

broer or custodian ban preferably by fax or by email.

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Documents

CF601 Corporate Finance