An Initial Public Offering (IPO) is the introduction of a share (counter) onto the public stock exchange. It marks the first time shares are made available for public purchase and trade. Last year we saw the introduction of Cassava Smartech, a spin off from Econet Wireless Zimbabwe which while not an IPO became the biggest counter on the ZSE with a market capitalization (total value) of $3.4 billion on the first day. It got people wondering why they aren’t more listings and especially IPOs when there is clearly an appetite.
Why the stock market matters
Before we delve into the whys and the wherefores I think we should first gain an understanding of the importance of the stock market and perhaps dispel some misconceptions you may have about it. The stick exchange performs two very important functions.First it allows those with businesses to link with those who have funds available to finance their ventures. Secondly it provides a snap shot of where the economy and sectors of it are headed.
Big businesses need quite a lot of funding to operate at scale. Funding is not easy to get at all and the stock markets were designed to eliminate the access to funding problem, or at least mitigate it. Surely going door to door asking for contributions to your business idea even in the age of crowdfunding is still a huge task. The corporation was created to enable those with businesses and business ideas to rally many small contributors to their cause by offering small ownership units in the business.
Once an IPO has occurred the shares can then be traded freely on the market. Generally people make applications for the shares then buy them up and an IPO is the first instance of them being available for trade. The price thereafter is derived from what buyers and sellers agree on at the time, this is why prices go up and down so often. The prices of shares are a very important economic indicator because they are based on the confidence, so all that news about Cassava being being valued at over $3 billion on introduction didn’t mean they had amassed $3 billion in assets but rather that the confidence the market placed on Cassava shares valued them at 3 billion dollars.
IPO rules for ZSE
The ZSE has specific rules for listing companies on the stock market. We will go through some of these and explain the backdrop and importance of them. We will also look at how these rules have contributed to the lack of IPOs
5 years of suitably profitable trading
This one May rub start ups the wrong way but this one of our rules. The specific rule from the Zimbabwe Stock Exchange act reads;
The purpose of this rule is to allow seasoned campaigners who have been through their teething phases and are proven concerns only to access the stock market. Regulating markets has to be done carefully because the rules must cater to the concerns of every Zimbabwean. Without such a rule I’m sure we would’ve had cryptocurrency companies set up and trading that would at this point be dead in the middle of a cryptocurrency slump. As if the Zimbabwean investor didn’t have enough problems already.
10 million US dollar Capital (and reserves)
This has to be the most bizarre one of all the conditions and that’s speaking conservatively. The ZSE did make it clear that the 10 million was specifically US dollars and that it was a guideline they could wave it if they saw fit.. Current market capitalization figures on the ZSE show that 8 of the active 57 counters (that’s 14%) have a market capitalization below $10 million. But that’s 10 million in RTGS bond and not necessarily 10 million US dollars. Now we must of course bear in mind that the ZSE was essentially reset in 2009 with dollarisation. The recapitalization process has been slow due to other challenges besetting the economy.
The other requirements are that at least 30% of the shares be available to the public, a minimum of 300 shareholders hold shares at the time of initial offering and that the number of total shares be at least 10 million. These are perhaps straightforward with the aim of insuring that there be no concentration of power and thus protect minority shareholders. They have also leniently allowed pricing of shares to the tune of 4 decimal points of a cent. That’s very inclusive. For interest’s sake the last IPO on the ZSE was Getbucks in 2016, a microfinance institution and it broke a 5 year drought.
What needs to be done
Certainly some of the requirements need to be relaxed or updated to consider the time we live in. The world moves a lot faster and there is the great risks of startups forever being a feeding frenzy for the bigger fish if they cannot get funding to scale fast enough. That or simply being pushed out of the market by superior financial muscle. The introduction of the Zimbabwe Emerging Enterprises Market goes a long way towards meeting the funding gap between startup and ZSE by allowing smaller companies an exchange to list on. With more realistic requirements of $250000 capital (including reserves) and 26% of the shareholding being available to the public it allows opportunity. The ZEEM is seen as an incubator for companies to launch them onto the ZSE. This is commendable.
The entire economy is facing challenges. Where incomes are eroded disposable incomes and savings are the first things to go. The lack of savings means we have less to invest. As such we need to consider processes that are less stringent but maintain the standards of investor protection. The Cassava introduction is evidence that even in the midst of economic crisis the market has an appetite for the right offers. Surely there are ways this can be addressed.