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Over the
past few years, one can observe in the market that new
business firms are increasingly floating larger and larger
volumes of shares to start businesses.
Recently,
more and more business entities in cement, food, beverages,
transportation, oil, banking, and other economic activities
have been seen in the media floating shares for the public
market.
Vigorous
advertising campaigns can often be heard on radio, seen on
television and read in newspapers published everyday.
Companies are relentless in their bids to convince the
public to buy their self-described “promising” shares.
Businesses
need money to get started, expand and grow, and that money
does not need to come exclusively from the banking sector.
When setting up a business, entrepreneurs often raise some
of the money from savings, friends and family, and the
remainder from banks, venture capitalists or individuals who
have wealth and liquid assets.
Shareholders get a receipt for their money which shows that
their investment in the business makes them part-owners of
the company and gives a share of the business.
Unlike commercial banks which provide short-term financing
at specified interest rates which has to be repaid,
shareholders are not lenders; they are owners. For instance,
if there are 100,000 shares issued by a company, an
individual having 10,000 of them owns one tenth (10pc) of
the business.
Businesses or companies are obviously run by managers and
boards who are the shareholders' employees just as much as
the building construction foreman or the guards. Being a
shareholder carries all sorts of privileges, including the
right to appoint the board and the auditors.
Shareholders benefit twice over when a business is doing
well. They get dividends as part of their company's profits
and additional income when the value of the shares goes up
and they sell them - reaping capital gains (appreciation).
The return on shares over the long term is generally
assumed to be substantially better than inflation or growth
in pay and notably better than most of what others get from
savings.
The dividend payout amount varies with what the company can
afford to declare or payout, which, in turn, depends on the
profit it posts. The return to shareholders may, therefore,
not be the same as what was pledged at the time the shares
were floated to raise capital. Companies may experience dull
business for many reasons or may not be run as promised.
Businesses do not go in straight lines, after all.
If the company fails to make a profit shareholders get
nothing, and if it goes bust or bankrupt, they are at the
back of the queue for getting paid after winding up the
business.
When a business is incorporated - rather than being a
partnership or proprietorship - the owners and shareholders
can only lose the money that they used to buy the shares
initially. Whereas, in a proprietorship or partnership, each
partner will have unlimited personal liability including
being liable for the debts of the business; right down to
their last gold finger-rings.
So, even if an incorporated company goes spectacularly
broke, owing millions of Birr, the creditors cannot come
knocking on the shareholders' doors for a repayment of the
debt that the company owes.
Businesses, after starting operations, may need more cash
than what was initially planned or raised. Moreover, the
original investors or shareholders may want to sell their
shares when the business makes a profit.
In selling their shares, they have to find an interested
buyer. This search is not always easy and involves haggling
over negotiations on the price interested buyers have to pay
to the original investors. This process then calls for the
existence of a marketplace where the shares can be valued,
traded and sold.
No one
could miss the wider economic benefit of floating shares and
raising capital from the public, as businesses can produce
more output, jobs, income, and wealth for the shareholders
and the nation. The new businesses may also help to reduce
the economic power consolidated in enterprises that produce
similar goods or services, creating market competition and
benefiting the consumer.
The
evident increase in share-floating activity is a healthy
development and is significant for the nation's economic
development. The share-market therefore needs to grow
further. But how much is known about shares and their
trading rules by the public is a question that begs an
answer.
Financial
information from experts, newspapers, radios, televisions,
newsletters, brochures and mail shots may be available to
investors, and some of it may be free. But investors, in
their decision to buy shares, still have to collect, sort
and sift all the material, and test it to see if any of it
is worth acting on for investment.
In the
developed world, share-trading is done from one's personal
computer with payment being just another electronic
instruction to transfer funds. In this arena, it is
increasingly becoming more like a computer game.
In
developing countries such as ours, individual investors need
to look for professional dealers or promoters to carry out
their investments or sell orders. This is often done through
telephones, personal contact with share-buyers or with
branch offices opened to facilitate trading shares.
In short,
share-buying, transferring and selling is not an easy
capital transaction or economic activity, as the secondary
market is virtually non-existent.
The
existence of a secondary market showing the shares' gained
premium allows the government to tax the gains or profits
made from share-trading. That, I think, was originally
presumed to be a revenue base for the capital gains tax
introduced about 15 years ago.
Although,
this time around, the days look sunny for the share-market
to blossom in the economy and new businesses are
increasingly seen promising very fat returns on every
investment in Birr, investors in their decision to buy
shares do not seem to be provided with relevant statistical
data or adequate information on various share-floating
businesses.
I remember
once, an individual came to my office for advice on which
bank to invest his money in. Understandably, since my
professional mission and ethics would not permit me to judge
the banks and say that this bank was better than that bank
(being a watchdog of the financial institutions in the
country) my answer was, "I do not know."
But, as
the person felt unhappy and surprised with my dispassionate
reply, I advised him to read into the audited financial
statements of all the banks and decide for himself where to
invest. This was my only response and advice.
Investors,
in looking for an investment alternative in the economy,
need to make the decision to invest after weighing all
available market information and financial advice.
It then
becomes necessary for government institutions, responsible
for registering and licensing businesses, to prepare a
database of companies and firms that have commenced business
by floating shares. They, then, must provide statistics and
facts about the companies' price-earning ratios, profits,
financial statements and balance sheets, and make it all
available to investors.
All banks
publish an annual report and produce a detailed financial
statement, but the data are not compiled or organised for
investors to have adequate information on where the value of
the shares stand compared to the floating time price.
This
information needs to be readily available to investors to
assist them in their increased investment undertakings.
Otherwise, they have to look for someone to recommend the
businesses that would offer better returns or seek advice
from families, customers, or write-ups in newspapers,
magazines and prospective brochures.
But,
remember that all advice in share-buying or investment must
be treated with ultra-caution and scepticism, as the person
persuading someone to buy a share may have self-interests or
motives such as those generated due to having a large amount
of that business's shares.
The extensive share-floating by a variety of businesses in
the market and the increasing importance of the equity
market to raise capital from the public to start up new
businesses provide enough justification for creating a
public marketplace. Businesses need a place to go public and
investors need to be able to make rational investment
considerations and decisions more easily and with less cost.
We cannot deal with problems by ignoring them or by letting
them get bigger before we respond. It is time to mull over
ways of creating a public marketplace for share-trading and
add another success story to Ethiopia's economy, like the
impressive Ethiopian Commodity Exchange.
Not only can private businesses raise money from the equity
market, governments can also mobilise funds by floating
shares. Recently, it was reported that the government of
India has expressed its willingness to reduce its stake in
profitable state enterprises by offering at least 10pc of
their shares to the public to raise money to finance the
country's fiscal deficit (forecasted to reach close to seven
per cent of its gross domestic product this year.
Is there a
lesson to draw from the experience of India? That is for the
concerned government bodies to consider. |
