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THE ROLE OF THE GHANA STOCK EXCHANGE AS A CAPITAL MARKET INTERMEDIARY AND ITS DEVELOPMENT CHALLENGES MR. S.K. PEPRAH, SENIOR MANAGER, GHANA STOCK EXCHANGE MAY 2004 1. CAPITAL MARKET - NATURE FINANCIAL MARKETS MONEY MARKETS CAPITAL MARKET SHORT TERM LONG TERM FUNDS/INSTRUMENTS FUNDS/INSTRUMENTS (Securities) (Securities) i. Market for long-term debt and equity. ii. Instruments are mainly government and corporate. 2. CAPITAL MARKET - STRUCTURE SEC (Regulator) The Stock Market Broker Dealers Collective Investment Vehicles Investment Bankers Registrars Custodians 3. CAPITAL MARKET - ACTIVITIES Activities are classified as either PRIMARY or SECONDARY Primary Market - for new issues of securities - Proceeds of sales go to the issuer of the securities sold. Secondary Market - for already issued securities. - Exchange and over-the-counter. - Proceeds of secondary market sales accrue to the selling dealers and investors. 4. CAPITAL MARKETS - ROLE - Provide a market for raising long-term capital. - Major link between companies (and Government) with long-term capital needs and the public with savings to invest. - Saves companies the interest burden associated with the use of short term borrowed funds. - Promotion of economic growth. - Job creation through business expansion. - Promote thrift, savings and investment habit. - Provide liquidity to investors. 4. CAPITAL MARKETS – ROLE (c’ont) - Provide a variety of methods to raise funds. - Establish a pricing mechanism for financial assets. - Provide a powerful tool for governments and policy makers to manage economies. - Jobs for financial analysts, brokers, investment lawyers etc. - Improve the visibility of listed companies. - Enhance corporate transparency. - Improved share price appreciation. - Enhance volumes of securities trades. 5. GHANA STOCK EXCHANGE HISTORICAL BACKGROUND July, 1989 - Incorporated as a private company limited by guarantee. November, 1990 - Commenced Operations. April 1994 - Changed status to a public company limited by Guarantee. 6. GSE - INSTITUTIONAL ARRANGEMENT GSE is governed by a Council of 13 members. Membership of the Council represent Listed Companies, Licensed Dealing Members, Banks, the Money Market, Insurance and the general public. The Managing Director of the Exchange is an ex-officio member. 6. GSE - INSTITUTIONAL ARRANGEMENT (c’ont) The Council sets the policies of the Exchange. The functions of Council include the following: - prevention of fraud - Maintenance of good order among members. - Regulating the stock market business - Granting of listing 7. GSE - MEMBERSHIP The Exchange has no owners but members. 55 members currently. There are three categories of members viz. - Associate Members (35) - Licensed Dealing Members (LDMs) (14) - Government Securities Dealers (17) (many of whom are either associates or LDMs already). 8. GSE - LEGAL/REGULATORY FRAMWORK Legislation - The Companies Code, 1963, (Act 179) - The Securities Industry Law, 1993 (PNDC L.333) - Securities Industry (Amendment) Act, 2000 Act 590 - Securities and Exchange Commission Regulations 2003 1728 - Act 1695 GSE Regulations/Rules - Stock Exchange (Ghana Stock Exchange) - Listing Regulations, 1990 LI 1509 - Stock Exchange (Ghana Stock Exchange) - Membership Regulations, 1991 LI 1510 - Trading and Settlement Rules - Rules on Take-overs and Mergers. 9. GSE - STRUCTURE AND PRODUCTS STRUCTURE - 14 Licensed Broker/Dealers (LDMs) - 26 Listed Companies - 4 Registrars - 3 Custodians PRODUCTS - 26 Ordinary shares - 4 Corporate Bonds - 25 GGILBs 10. GSE - MARKET OPERATIONS TRADING - Manual - Continuous Auction Trading (CAT) - 3 times a week (Mondays/Wednesdays/Fridays) - Re-opening period – 9.00 a.m. to 10.00 a.m. - Market Opens at 10.00 a.m. (Opening price for listed securities established) - Substantive Trading – 10.00 a.m. to 12 noon - Over the Counter (OTC) trade allowed in AGA shares only. - Short selling is not allowed. 10. GSE - MARKET OPERATIONS (c’ont) CLEARING AND SETTLEMENT - Manual but centralised - Settlement cycle for equities is T + 3 (3 business days after trading) - Bonds settle same day (T + 0) - Good delivery rule is DVP (delivery versus payment) - Failed Trades are sanctioned. 10. GSE - MARKET OPERATIONS c’ont LISTING - Three tiers/windows exist on the official list for the shares of small, medium and large companies. - Regulations permit the listing of both local and foreign companies. 11. GSE - METHODS OF BRINGING SECURITIES TO THE EXCHANGE There are 3 main methods of gaining entry to the GSE:- - Introduction - Private Placement - Offer to the Public 11. GSE - METHODS OF BRINGING SECURITIES TO THE EXCHANGE cont INTRODUCTION - Company does not have to raise new capital. - Shareholders do not need to reduce their shareholding. - Securities to be listed are widely held. - Securities are of such an amount that they are assumed to be adequate/marketable. - The cheapest method of entering the market. 11. GSE - METHODS OF BRINGING SECURITIES TO THE EXCHANGE cont PRIVATE PLACING - A Broker offers the shares privately to selected individuals/institutions. - Does not constitute an offer to the public. - Therefore, no prospectus is required. 11. GSE - METHODS OF BRINGING SECURITIES TO THE EXCHANGE cont OFFER TO THE PUBLIC - May be an offer for subscription or an offer for sale or both. - Company invites the public to subscribe (if an offer for subscription) - The proceeds accrue to the company. 11. GSE - METHODS OF BRINGING SECURITIES TO THE EXCHANGE cont OFFER TO THE PUBLIC - Existing shareholders invite the public to purchase their shares (if an offer for sale) - The proceeds accrue to the selling shareholders. - An offer to the public always requires the circulation of an approved Prospectus. 12. TAXATION - 10% withholding tax on dividends (this is final) - Corporate Tax - Stamp duty on the transfer of listed securities abolished with effect from March 20, 1996. - Capital gains on listed securities exempted from tax (initially from Nov. 12 1990 to Nov. 11, 1995. Subsequently, extended to Nov. 11, 2000. Further extended for another 5 years to Nov. 11, 2005). 12. TAXATION (c’ont) Shares received as a gift – liable to Gift Tax in the hands of the person receiving the shares (the tax – varies from 5% to 15% depending on the value of the gift). Registration of notice of any increase in Stated Capital in excess of ¢5,000 – registration fee of 0.2% of the value is payable. Corporation Tax - 30% for listed companies, 32 1/2% for all others. Newly listed Companies (for the next 3 years) Corporation tax at 25% (All others – 30% Corporate tax with effect from 2005. 13. GSE - AN INTERMEDIARY Shares Volumes and Values - Shares valued ¢1,158.85 billion traded - Shares traded amount to 740.78 million 13. GSE - AN INTERMEDIARY Capital Raised - Capital Raised - Equity Issues: - IPOs - ¢320.88 billion - Rights/Additional Shares - ¢272.61 billion 13. GSE - AN INTERMEDIARY Corporate Bonds - US$16.5 million Government Bonds- ¢1,552 billion Market Capitalization - ¢33.5 billion in 1990 - ¢96,367.95 billion as at May 24, 2004 Market Index GSE All-share Index rose from 70.08 points in 1990 to 6,824.39 points by May 24, 2004 7,000 May-04 6,000 5,000 4,000 Dec-03 3,000 2,000 Dec-02 Dec-98 Dec-01 Dec-97 Dec-00 1,000 Dec-99 Dec-95 Dec-96 Dec-94 Dec-91 Dec-92 Dec-93 - Share Price (¢) 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 0 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Share Price (¢) Dec-96 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 0 Dec-97 Dec-90 Dec-98 Dec-91 Dec-99 Dec-92 Unilever Ghana Limited Dec-93 Dec-00 Dec-94 Dec-01 Dec-95 Dec-02 Dec-96 Dec-03 Dec-97 May-04 Dec-98 Dec-99 Share Price Performance Dec-00 Dec-01 Standard Chartered Bank Gh. Ltd. Dec-02 Dec-03 May-04 Share Price (¢) 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 0 Jan-91 Dec-91 Jan-93 Dec-93 Dec-94 Dec-95 Share Price (¢) Dec-96 Dec-97 1,000 2,000 3,000 4,000 5,000 6,000 7,000 0 Dec-98 Dec-90 Dec-99 Dec-91 Dec-92 Dec-00 Dec-93 Dec-01 Dec-94 Enterprise Insurance Co. Ltd. Dec-95 Dec-02 Dec-03 Dec-96 May-04 Dec-97 Dec-98 Dec-99 Share Price Performance Fan Milk Limited Dec-00 Dec-01 Dec-02 Dec-03 May-04 Share Price (¢) 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 0 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Share Price (¢) Dec-96 1,000 1,500 2,000 2,500 3,000 3,500 0 500 Dec-97 Dec-98 Dec-94 Dec-99 Dec-95 Mobil Oil Ghana Ltd. Dec-00 Dec-96 Dec-01 Dec-97 Dec-02 Dec-98 Dec-03 May-04 Dec-99 Dec-00 Share Price Performance Mechanical Lloyd Co. Ltd. Dec-01 Dec-02 Dec-03 Mar-04 Apr-04 14. DEVELOPMENT CHALLENGES - GSE - Number of listings (equity/debt) stunted in growth. - Low Level of liquidity - Inadequate Infrastructure – Manual trading, CSD - Inadequate local investor participation. - Interest rates - Inflation 14 DEVELOPMENT CHALLENGES - GSE (c’ont) - Forex exposure - Pricing efficiency - Skepticism of potential companies. - Relatively expensive rates/charges - Abolition of dividend tax (especially for individual investors) - Government should use the market as a conduit for divesting itself of good SOEs. - Restrictions on foreign portfolio investments. - Expanding coverage of promotional programmes. 15. CONCLUSION The role of the Stock Exchange as a Capital Market intermediary in the whole process of wealth creation and national economic development can not be over emphasised. It can be easily seen in the growth of the economies of countries in Asia e.g. Malaysia, South Korea, etc. In our circumstances also, the statistics presented in this review have indicated clearly and undeniably that the Ghana Stock Exchange has served as a veritable. 15. CONCLUSION (c’ontd) Channel through which the flows of savings have been allocated to investment. The Stock Exchange has provided a variety of financial assets and a variety of methods for raising funds on the Ghanaian financial landscape. Without the further development and enhancement/strengthening of our stock market we can not hope to promote the efficient allocation of resources from savers to the users of capital to ensure the stimulation of our domestic industry/job creation.
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