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Though there have been promises and efforts over the
past 10 years or so to establish a stock exchange
(such pledges coming both from the government and
private sector), Ethiopia does not have a single
one, yet.
The current rapid increase in share companies
soliciting equity from the public calls for the
speedy establishment of some sort of an exchange, at
least in Addis Abeba. Hence, amid government
reluctance towards intervention, the question that
must be answered is whether the existing legal
framework of the country allows the private sector
to take the lead.
A
stock exchange is an essential, though not the only,
element of the securities market. The other major
component is an over-the-counter (OTC) market where
securities are traded directly between buyers and
sellers or through financial intermediaries such as
brokers, dealers, and individual investors on a
one-on-one basis either directly or through
electronic networks.
Such exchanges play two unique functions: transfer
of risk and transfer of waiting. An entrepreneur can
transfer the risk of the loss of his business
activities to others through the exchange by
distributing the ownership of his venture among
investors. Marketability of securities is the most
important contribution of an exchange. Investors are
likely to be unwilling to hold long-term securities
if they fear that the securities they intend to buy
cannot be converted into cash without much trouble
and wait.
Besides, stock exchanges play a vital role in
protecting financial investors under what is called
a self-regulatory scheme. It is only listed
companies that are able to sell their securities on
the trading floor. In order for companies to be
listed, they should fulfil certain requirements of
credibility for the exchange. Almost all exchanges
prescribe rules and regulations such as disclosure
of information, control of manipulation,
misinformation and fraud. Therefore, efficient and
effective exchanges can complement state regulation
of the market.
Ethiopia's brief history of exchange shows that
there were share and bond dealings under the
sponsorship of the National Bank of Ethiopia (NBE)
starting in March 1965. Later, the Addis Abeba Share
Dealing Group was set up to trade in shares and
government bonds. The arrangement of the Dealing
Group was to restrict the membership of the group to
seven founding members for a while, with the desire
to enlarge the membership base and eventually
establish a stock exchange.
The group started functioning with share dealings of
15 listed companies and four government bonds, and
the number of listed companies reached 17 by 1966.
It had its own rules and regulations.
This group used to meet weekly under the
chairmanship of the governor of the central bank,
Tefera Degife, for the purpose of trading shares
among themselves and their clients. Trading was
conducted by "call over" and transfer of bearer
shares was achieved by delivery. At the same time,
some members of the group maintained OTC trading
facilities, and the public's access to the market
was through these agencies.
Each of these institutions had an official with the
title of "share dealer" who kept regular office
hours for dealing in shares with members of the
public. These dealers offered two types of services:
buying and selling shares and bonds on a cash basis
on behalf of the portfolios of their respective
institutions and providing third party brokerage
facilities for clients.
However, the development of a stock exchange was
nipped in the bud because of the post-1974 socialist
economic policy.
After three decades, Ethiopia seems to be back at
the starting block trying to make sense of what such
marketing systems are all about. In the absence of a
structured market, established and newly emerging
firms are trading their shares to members of the
public in what is described as the "primary market."
The organisation of stock exchanges varies from
jurisdiction to jurisdiction and even within a
jurisdiction. There are at least three forms of
stock exchanges around the world: a company, an
association of members or state owned. For instance,
the New York Stock Exchange (NYSE), which is the
largest stock exchange in the world in terms global
market capitalisation, with 28.5 trillion dollars as
of May 2008, was initially established by an
agreement between 24 stockbrokers, then
re-established as a not-for-profit organisation in
1971, and became a profit organisation as recently
as 2005.
The history is almost similar to the Bombay Stock
Exchange (BSE), which initially was established as
an association of brokers but changed to a
corporation in 2005. On the contrary, the Ugandan
Securities Exchange (USE) is run by the Capital
Market Authority, which is a state agency.
The London and Amsterdam stock exchanges are the
earliest securities trading places in the world.
Their inception and development were as cooperatives
or mutual associations, a form in which stock
exchanges operate as not-for-profit organisations,
providing services to their members. Though this
form of organisation was dominant to this date, now
the world's major stock exchanges are changing their
form to for-profit corporations, under the process
called demutualisation.
The mutual or the association forms of stock
exchanges have been in existence for almost three
centuries. But scholars argue that advances in
technology have brought about a wave of change.
Traditional exchanges have to compete with the new,
technology savvy, for-profit and OTC markets. In
order to do that, the former exchanges need to raise
capital.
Considering the experiences of other countries,
there are three options for Ethiopia to establish a
stock exchange.
The first is a state owned exchange with regulatory
framework and supervisory authority. This could
follow the structure and governance of the commodity
market that is now in place. This alternative
appeals to me more, considering the concern of the
financial viability of an exchange without
government support. But lack of enthusiasm from the
state forces us to look for other options.
A
private sector led profit oriented stock exchange in
the form of a corporation following the recent
global trend is the other alternative to pursue.
Unfortunately, the activities of a stock exchange
are not included as a business venture in the
Commercial Code. Neither is the case in the business
registration and licensing laws of the country,
though stock brokerage is recognised as a business.
And this deadlock may lead us to contemplate the
possibilities of forming a mutual form of stock
exchange that has been prevalent throughout the
history of exchanges around the world. This may
sound bizarre to an Ethiopian lawyer, though.
The main purpose of exchanges is to provide a
trading place for brokers and dealers so that
securities trading can be facilitated. This can be
done by an exchange established with a mutual
association of players, without expecting profits
from such services. Similar to the early experience
of many exchanges, Ethiopian stockbrokers and
dealers, if there are any, can form an association
to run trading places for securities.
However, the future securities law of the country
should define the future model of securities
exchange. The mutual form of exchange was dominant
throughout history. Now it is being replaced by the
corporate form of exchanges. Hence, the law should
take into consideration this new trend. |
