Increasing Private Sector Participation in the Stock Exchange in Mozambique
The Mozambique Stock Exchange (BVM) is very small with only five listed companies and very little trading. Market capitalization/GDP and turnover/GDP ratios are among the lowest in the world, and little capital has been raised through new issues in the past few years. The newly installed management team at BVM is determined to make the market larger and more active in order to make it an effective source of finance in the next phase of the country’s development.
There is a considerable overlap between the objectives of the BVM and the SPEED+ Program’s objectives: both aim to improve the business environment by making the corporate sector more transparent and both aim to enhance protection of minority investors. The BVM seeks to accomplish these aims since it can only build a thriving equity market if the entire business sector is more transparent, laws are enforced and investors have confidence that their interests are protected.
Both the SPEED+ Program and the BVM aim to secure better protection of the rights of minority investors through revision of present laws. Other areas where the objectives of the BVM and SPEED+ coincide are a) upgrading accounting standards, b) development of credit bureaus and c) reform of bankruptcy law.
In addition to advocating specific reforms in the business environment, the BVM, like all stock exchanges, has a pivotal role to play in upgrading standards of corporate governance, which means the system by which corporations 1) choose their objectives, 2) formulate and execute plans to attain those objectives, 3) ensure that the activities of the company are consistent with the interests of all shareholders and 4) make sure that the company respects the law and observes good business practices. Recent reports by international bodies, such as the African Peer Review Mechanism and the Africa Corporate Governance Network have highlighted several serious shortcomings in corporate governance in Mozambique.
The stock exchange promotes good corporate governance by enforcing its rules for listed companies including those about disclosure and requirements for mechanisms to empower investors. Beyond this, the BVM has the capacity to be a prominent institutional advocate of a stronger business environment in its interactions with the media and the authorities. The stock exchange only directly influences listed companies. Nevertheless, by pressing for reforms in the legal framework and setting rules for listed companies, which are usually the most visible in any country, it tends to raise norms for all companies, whether listed or not.
In addition to its role in promoting a sounder business environment, the BVM is a mechanism for raising capital. However, in current circumstances it is not fulfilling this mission, since all potential participants in the capital market--issuers, intermediaries and investors-- are characterized by low levels of activity and awareness. A successful reform must spur all of these market participants to higher levels of activity. This report contains a series of recommendations to accomplish this aim. Some of the recommendations for reform can be initiated by the BVM alone, but many will require legislative and institutional reforms throughout the capital market. For example, the report makes recommendations about the ownership, governance and regulation of the BVM, which will require changes in the law.
Capital markets business is now dominated by the banks, which generally do not perceive investment banking or trading as areas with strong potential. Some recommendations are made about how the laws and regulations might be adjusted to oblige banks to establish specialized subsidiaries and to stimulate the emergence of more non-bank intermediaries such as brokers, dealers and investment banks.
Neither companies nor investors are well informed about the basics of equity investment. Many companies do not see any advantages of public listing, since the capital market has not proven to be an effective vehicle for raising funds the burden of listing, such as dilution of insider control, mandatory disclosure and the risk of shareholder litigation are also dissuasive. A series of measures to increase investor interest in the equity market of Mozambique is suggested with the enactment of a law on mutual funds and easing of exchange restrictions on foreign investors cited as specific steps that should be taken very soon.
The report also observes that the number of listed companies may soon rise due to a planned wave of new issues by IGEPE the institution that is responsible for companies with state ownership and by listing of “megaprojects” in the natural resource sector. While welcoming the rise in listed companies, the report emphasizes the need to strengthen the corporate governance rather quickly, since experience shows that large-scale privatization without adequate safeguards for investors can have disastrous economic and social consequences.
Finally, some suggestions are put forth about how the investor community can gain better access to financial information.