Alex Magaisa

Alex Magaisa is a senior lecturer at the Kent Law School. Prior to joining KLS, he worked for the Jersey Financial Services Commission, the financial services regulator in Jersey. His research interests lie mainly in financial services regulation, law of corporate groups and the effects of IP Laws on developing countries. Alex takes a keen interest on legal and political issues pertaining to Zimbabwe and Africa generally.

A new ‘indigenous’ stock market for Zimbabwe?

Indigenisation ... A stock broker at the Zimbabwe Stock Exchange

I WONDER if designers of the indigenisation laws considered the practical ramifications of the 51% indigenous ownership rule particularly in the case of publicly-listed companies. It is effectively means that 51% of all publicly-traded companies required to comply with the laws will be restricted to a market of indigenous investors. Not only does it require vigilant and systematic monitoring, but it is apparent that there will inevitably be a distortion of the stock market.

Just in case not everyone is familiar with the operation of stock markets where listed companies’ shares are traded, perhaps a little very basic description is in order.

There are two types of companies – private and public. The latter is allowed to market its shares to the public whereas the private company is not. Usually, most companies start off private, with less onerous obligations. But the company’s ability to raise funds from the public is limited since it is restricted from selling shares publicly.

So as the business grows, it makes sense to convert from private to public company status. For practical purposes, it also makes sense to simultaneously have the company’s shares listed on a stock exchange, such as in our case, the Zimbabwe Stock Exchange.

The stock exchange is the equivalent of Musika, the farmers’ market. The shares are there for all to see and for anyone to buy just as the farmers’ tomatoes from whatever part of the country are there for all to view and buy at Musika. The main purpose of listing is to bring your company’s shares to a platform where they will be visible to and tradable by more people. And because you are seeking to raise capital, it makes sense to list on the shares musika.

To extend the analogy further, the Mrehwa farmer figures it probably makes better business sense to bring his tomato harvest to Mbare Musika than to stand by the roadside along the Harare – Nyamapanda road. He knows the market at Mbare Musika is bigger than at the roadside market. In the same way owners of public companies who wish to raise more funds know that they must go to the stock market and use the facility to sell the company’s shares to the wider public.

Usually, the biggest companies are listed on the stock market. But because the shares can be bought and sold by and to any person, there is always the risk that the founder can lose control of his company – hence the phenomenon of friendly and hostile takeovers of companies. There is a whole body of literature analysing the pros and cons of takeovers but suffice to say it is a natural phenomenon arising from the public character of the stock market.

As we have seen, the beauty of the stock market is that Investor A can sell his shares to Investor X without ever having met each other; without ever having spoken a word between them – these transactions usually take place through professionals called share brokers. Investor A can be a red Zimbabwean selling his shares to Investor X who is a blue Zimbabwean or a green European. All Investor A needs is money for the value of his shares. What prompts him to sell is probably that the company’s share price on the stock market would have risen because the market perceives that the company is doing well.

But there has to be someone available and willing to buy and he does not want the cost of searching and verifying the identity of the buyer. In fact, such searches could reduce the market’s efficiency – it negates the whole aim of listing company shares and facilitating ease of trades.

With the indigenisation laws, however, it means 51% of the company must at all times remain in the hands of the indigenous as defined in the law. As an indigenous investor, you must sell your shares to another indigenous investor. You no longer have the liberty to sell to anyone else. Essentially, it means that the market for indigenous share owners in listed companies will have to be restricted to indigenous buyers only for to sell to a foreigner would upset the balance.

The implication of this is the creation of a severely restricted ‘secondary’ market for indigenous investors. It also means a severe distortion of the stock market and limitations in terms of access to capital for Zimbabwean listed companies – since at least 51% of what they seek can only be raised among locals.

But then, what if the indigenous buyers are limited or unwilling to pay the price? This punishes even the honest and hard-working indigenous investor who owned shares before the inception of this rule because suddenly he finds himself with a restricted market of indigenous buyers.

I could go on and consider how this will affect the take-overs market especially where companies are really struggling and need another company to bail them out via take-over.

I could go on and discuss the difference in the types of securities issued to investors – preference shares, ordinary shares, debentures, etc – issued by companies seeking to raise capital and how this will also be affected by the regulations.

The larger question, of course, is how all this will be enforced going forward. Unless there is a formal indigenous securities’ market, it’s difficult to see how the restrictions on sales will be enforced on a regular basis. And it will prove cumbersome for indigenous investors to trade their shares without flouting the regulations.

In addition, it’s hard to see how publicly listed companies can be made accountable for change of ownership of shares between investors. Once given to the indigenous investors, the company can have no control over what the indigenous investor does with the shares. The share represents the investor’s interest in the company and the investor has a legitimate right to deal in the share as he deems fit. The indigenous investor is free to keep or sell the shares in accordance with stock market norms. To restrict him would be to deny him his freedom, too and therefore negate the whole essence of empowerment.

Perhaps the state would have put in place a rule that gives them the right of first refusal in the public share market. This would have the effect that whenever an indigenous investor wants to sell his shares, he would be obliged to make a first offer to the state which would decide whether or not to buy. But surely, if the state had the resources to buy the shares in public companies, they would simply have bought 51% of every foreign-owned company and then sell on the shares to indigenous Zimbabweans. The state has no money.

In fact, inserting the right of first refusal would not work just as it didn’t work in relation to the land issue when the state failed to maximise on its right of first refusal for many years after independence in 1980. In any event, the state has a poor record in business management as evidenced by the demise of almost every company in which it has a majority interest, the ailing Air Zimbabwe being a prime example. Furthermore, it would have the potential to create a bureaucratic and cumbersome process that would cause stock market inefficiencies.

As I have always maintained, I have no problem whatsoever with the theory behind policies to take ordinary people out of poverty and to benefit local communities from natural resources. Some people think when we are critical and point to loopholes that we are stridently opposed to ideas of empowerment. No, we are not. We simply plead that there be some modest investment in careful thought before taking steps that ultimately kill the proverbial goose that lays the golden eggs.

I am not sure if the practical ramifications discussed above were considered and if so, whether there are mechanisms in place to deal with the challenges.

When all is said and done, the great tragedy is that there is no ideological shift at all behind the indigenisation agenda – it is not challenging the neo-liberal capitalist system – rather it is an attempt to remove the shoes from the feet of one set of owners of capital and into them place the feet of a new set of owners, albeit bearing a different complexion. There is nothing original or revolutionary about it and that is what is really and truly sad.

E-mail: wamagaisa@yahoo.co.uk