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SHARE CAPITAL: QUESTIONS and ANSWERS

What is Share Capital?

In very simple terms, this is the sum of money the Shareholders/Owners pay into a business entity. These funds breathe life into the business entity enabling it to commence operations thereby achieving the objectives for which it was set up.

What is Equity Share Capital?

Equity share capital is also referred to as Ordinary Shares. In the Kenyan context, it is defined by the Companies Act. Ordinary shareholders are the real risk-takers and care-takers of the company. They enjoy the right elect directors and vote on issues affecting the company. The size of one’s stake determines the strength of one’s vote. It is not one man/woman vote.

Why does UNSACCO need Share Capital?

Public companies i.e Companies quoted on a Stock Exchange usually offer shares to the public. Many of our members have invested in Stocks on the NSE Money raised through issue of shares is a long term source of finance since it is not redeemable.

Although UNSACCO has operated long without Share Capital, it is considered safer to have an unredeemable share capital.

The UNSACCO needs to comply with the new law.

How will UNSACCO raise the required Share Capital?

Capital is normally raised by issue of shares to prospective investors. In our specific case, shares will be issued to existing members in accordance with the bylaws. The amount of Capital will be determined by the Regulatory Authority after reviewing the size and operations of the UNSACCO.

Note that current UNSACCO bylaws had already stipulated the issuance of Share Capital, but this had not been implemented over the years.

The big SACCOs in the Country have already issued Share Capital and will only regularize and bring it up to the required level when the law comes into force.

How much time will one take to raise Share Capital?

Ideally, for a new member, the initial contributions should go towards building up Share Capital before the rest goes to Deposits.

For current members, if it a decision is made to utilize retained earnings, this will be helpful. Otherwise, a slower buildup or one-off payment could be applied. Transfer from Deposits is not recommended since deposits are normally already committed.

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Can a member opt not to have Share Capital-have Deposits only?

It is possible with a Commercial Bank (having a Fixed Deposit Account) without being a Shareholder of the same Bank.The requirements of being a cooperator would not have been met.

What will happen if we do not raise the said Share Capital?

We do not envisage such a situation. However, the new law would require that we merge with another SACCO or dissolve.

Even Commercial Banks have been directed to increase minimum Share Capital. The unquoted small banks are likely to emerge if they do not these requirements. What happens if I withdraw or retire from UNSACCO?

The Regulatory Authority will clarify the type of shares to be issued: If:

Ordinary shares This can’t be withdrawn. Shares have to be sold to another member.

Preference Shares: Have preferential rights in respect of Dividend at fixed amount or at fixed rate.

Preference Shareholders have priority over Ordinary Shareholders both in repayment of dividend as well as Capital under a winding up process.

It highly unlikely that the Authorities will recommend issuance of Preference Shares which indeed have three classes

(i) Cumulative or Non-cumulative

(ii) Redeemable and Non-Redeemable.

(iii)Participating Preference Share or non-participating preference shares

This jargon is better left to Company Law.

At what price will the Shares be issued?

The nominal price and the minimum qualifying shares to be a member are set out in the bylaws. These can be varied depending upon the size of Share Capital that the Regulatory Authority will require us to issue and the number of members.

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Where can I find BUYERS or SELLERS of UNSACCO Shares?

Unlike a Stock Exchange, we do not see a formal market for such shares. However, the Society will have to maintain a Share register.

It is expected that members with more Shares than the minimum required may want to dispose of the excess Shares

The society will only record the change in Shareholding at a fee to the Seller, but not in determining the price at which Shares are exchanged nor handling of the proceeds i.e the Society will not be a Share Broker nor the Central Depository System.

I am retiring in a few years and do not want to participate in the Share issue:

Unfortunately, the requirement does not exempt this scenario. The only escape route could be a withdrawal preceding the Share issue. Withdrawal on such grounds is obviously not considered to be in the member’s best interests.

What is the difference between SHARES and DEPOSITS?

Deposits have previously been defined as Shares because a depositor in a SACCO actually owns part of the Society. In order to deposit, one must become a "member" of the SACCO.

The difference between Deposits and Shares is clearly illustrated by the fact that one can have Deposits at a Commercial Bank whether they are Shareholders of that bank or not.

Shall we continue drawing a high dividend?

This is determined by different factors at play in the entire economy in any given year.

The new law envisages a breakdown of earnings into:

(1) Interest on Deposits (an expense to the Society i.e to be paid before deriving surplus).

(2) Dividend on Shares (a distribution of surplus).

Interest earnings will attract a WHT of 15% whereas Dividends will attract the usual WHT of 5%.

It will be up to the individual member to perform the balancing act (where to invest more or less) within the given legal framework and other loan obligations.

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I think the GOK should exempt UNSACCO since it has no liquidity problems.

The new law addresses the bigger governance issue in the SACCO movement- not just liquidity. In any case, the fact that the Society does not have a liquidity problem does not mean this can not occur in future.

Who decides how many shares each member should buy (allotment formula)?

After receiving, from the Regulator, the Authorized Share Capital for UNSACCO, the CMC will decide on a fair allotment basis (if retained earnings are to be applied).

The Regulator has a maximum holding allowed per member whereas the Society will have a minimum qualifying Shares so this should not be a problem.

This is does not stop us from starting the process of issuing the minimum shares as per the current bylaws.

Can I borrow against my shares?

No, this is considered taboo. Borrowing will continue as usual-based on deposits. Borrowing against Share Capital would bleed the Society to death. In any case, this would defeat the purpose of creating Share Capital- to make the Society a Going Concern.

Why did the Society have a large balance in retained earnings instead of declaring higher dividends to members?

The balance in retained earnings means that the SACCO has been profitable over the years and its dividends to members have been less than its surplus.

Under the new law, maximization of Shareholders’ wealth should become an objective. It will be quite common to plough back surpluses. Rather than distributing all the Society’s cash to its members (as dividends), the Society may use the cash to pay for new assets and equipment in order to enhance provision of products and services.

It was proposed, at the last AGM , that some of these retained earnings should now be used to issue bonus shares to members since retained earnings are “forgone past dividends”