Getting Listed (GOING PUBLIC) Why Go Public?

There is a wide range of benefits that private companies and their shareholders can obtain from going public. Here are the most important ones: i. Fund raising The single main reason for going public is usually to increase the equity base of a company, thus allowing for future expansion and growth without the interest burden associated with the use of borrowed funds. A listing enables existing shareholders to raise substantial capital for their company by issuing shares to the public in exchange for a calculated price per share. The ability to raise funds from outside investors by the issue of shares is perhaps the most valuable of all benefits that accrue to companies on floatation. ii. Financial Benefits An immediate benefit enjoyed by a newly listed company is the considerable improvement in its overall financial position. The injection of substantial equity funds greatly improves the companies gearing and important balance sheet ratios. With such capital reinforcement and good management, higher earnings and dividends are almost certain to follow. iii. Loan capital issue opportunities Other types of share capital, such as preference shares, convertible or non-convertible, or loan capital such as debentures and notes which may or may not be convertible can be issued to raise further funds. The issue of such instruments by well-established and profitable concerns can be distinctly advantageous. It allows for an expansion in business without an increase in equity capital although the right of convertibility into ordinary share capital at a later date enhances the attraction of the instrument to investors. Such opportunities are undoubtedly far easier for a quoted company than for an unlisted one. iv. Mergers A tendency towards amalgamation within an industry and the growth of conglomerates has been a feature of economic development over the past few years in most industrialized countries. Uganda is no exception. A merger scheme based on exchange of shares appeals more to the sellers when the shares they receive are listed on the securities exchange and are thus marketable. v. Acquisition funding Acquisitions of any size are normally easier to fund as a public company. Private company ventures are often attracted to a sale where quoted shares are offered as opportunity to participate in the future growth of the combined businesses if they so wish. vi. Prestige and status Going public will raise the level of awareness of the company and its product in both the investment community and the public generally. This can result, for example, in a greater ability to attract high calibre employees, unprompted approaches by potential acquisition candidates and increased general business opportunities. Public companies also benefit from access to useful information brought to them by their advisors, financial analysts, stockbrokers and shareholders. A companys public profile at flotation and thereafter will

depend on the individual directors and shareholders involved, the nature of their business and the time and expense devoted specifically to attracting publicity. vii. Market valuation Shareholders and potential investors are able to check the value of their investment in the newly listed company daily by referring tom the price list of quoted companies as published in the media. This facility is a major advantage over investors in unlisted companies. viii. Liquid Assets A portfolio of quoted shares is generally regarded as being a highly liquid asset as shares may be sold through the Securities Exchange with the least amount of time and inconvenience. For the reason quoted shares are a most acceptable form of security to banks and other financial institutions. ix. Avenue for investment Quoted shares offer the investing public particularly institutional investors and pension funds, an attractive avenue for investment by virtue of their liquidity and the detailed financial knowledge and record of each quoted company that is available to the public. Many investors regard quoted as an attractive hedge against inflation. x. Freedom to invest By a public flotation, existing shareholders are placed in position to diversify their interests and invest in other assets elsewhere. xi. No restriction on transfer of shares Shares in a private company can generally only be sold to the remaining shareholders in terms of the Articles of Association of that private company. For this reason, they often do not realize their full sale potential. Shares in quoted companies are, on the other hand, freely transferable. xii. Realization of investment A key benefit that shareholders in private companies derive from flotation is the ability to dispose of part of their shareholders and establish a market valuation for the balance. When a company is floated the new investors will normally expect the management to retain sufficient holdings to guarantee their future motivation, but they would raise no objection to existing shareholders realising part of the investment through the stock market. xiii. Employee incentive Both for existing employees and those to be recruited, the ability of companies to offer share options and employee share schemes is a key advantage of public company status. At the time of flotation preferential allotments of shares to employees, linked trade associations and associated companies may be permitted by the Listing Committee up to reasonable quantities.

Qualifications for a Listing A Company intending to apply for a listing on the Uganda Securities Exchange must conform to the listing Rules and Regulations as stipulated in the Listing Manual which include: (a) A Company must have paid up capital of at least Ug. Shs. 500 million for the first tier and Ug. Shs. 250 million for the second tier. (b) At least 20 % of the issued equity capital for which a quotation is being sought must be offered to the public, whose value must be at least Ug. Shs. 500 million for the first tier and Ug. Shs. 250 million for the second tier. (c) The Memorandum and Articles of Association of the company must comply with the requirements of the Securities Exchange whether or not required by the law. (d) The Securities Exchange that the spread of shareholders existing at the close of an offer is sufficiently wide to justify the listing (approximately 300 shareholders is regarded as minimum). (e) A Company should have made profits during the last three years immediately proceeding application for listing. (f) The company should be engaged in substantially the same business and management, and share control throughout the last three years before the application. (g) The securities for which listing is sought, must be freely transferable, subject to any restriction that may be imposed by written law. Have only one class of voting shares, which shall be offered at the exchange. (h) The name, history and description of the companys interests and activities. (i) A report by the companys auditors in respect of the last completed financial years (five for the first tier and three years for the second tier) of the company if the company has been in existence for three, five or more years. (j) Forecast earnings and dividends. (k) Details of share capital structure, loan capital and the borrowing powers of the company. (l) The basic requirements are amplified in the Securities Exchange Listing Manual. (m) The investors rightly place considerable emphasis on market ability in accessing a companys shares as an investment.

The Flotation Team To bring a private company to the stage where it qualifies for a listing requires the co-ordinated resources of a number of skilled professionals, each of whom brings to the Flotation Team his own particular skills and experience. The team meets on a regular basis up to the date of issue and comprehensive minutes are kept. Many decisions have to be made throughout the period up to the actual flotation and these decisions rest with the Flotation Team. Its members normally include the following: A. Sponsoring Broker The sponsoring broker plays a crucial role in co-ordinating the flotation team and advising the issuer in various aspects of the issue. i Initial Appraisal An important initial view will be required from the sponsoring stockbroker on the suitability of a particular company for flotation and on the optimum timing of the flotation. ii The prospectus It is essential that the prospectus contains the details concerning a company in a format which is suitable for appreciation by the potential investor and which meets the requirements of the law and the securities exchange. The stockbroker will coordinate the effort by the flotation team in drafting the prospectus. iii Exposure to potential investors The stockbroker will assess the best method of marketing a particular companys shares and to liaise with the issuer and other professionals on presentations to potential investors. The sponsoring broker distributes to all its clients and likely investors a comprehensive report on the issue, together with a copy of the prospectus. The investing public normally direct their inquiries on the issue to the sponsoring broker. This will give the issue the best chance of meeting with a well-informed and enthusiastic response. iv Pricing The stockbroker has the unique insight into the price which the market finds acceptable and therefore has a prime role to play in the decision on the appropriate price at which the flotation should proceed. v Post-flotation support Once dealings have begun in the shares of a new market entrant, the stockbroker will ensure, as far as possible, that a liquid two-way market develops by providing information and general advice to investors on the listed company. The period after the shares are quoted often determines the success or failure of an issue and it is during this period that the stockbroker has greatest responsibility. B. Merchant Bankers Merchant Bankers play a crucial role in the period prior to the flotation and after. As experts in the field of finance and investments, merchant bankers will in consultation with company senior management and other professionals do the following: i Identify capital requirements and its composition

ii iii iv v vi vii

Draw corporate financial and investment strategy Be deeply involved in the drafting of the issue prospectus Be involved together with the sponsoring brokers in the pricing an timing of the issue Assist in the distribution of documents Perhaps the most important role of the Merchant Banker is the underwriting or arranging for the underwriting of an issue. By underwriting, the Merchant Banker evidences its support and confidence in the company which the investing public takes note of. Plays an important role in the allotment process including refunds and arrangement of successful applicants.

C. The Auditors The auditors of the company are normally appointed to the Flotation Team as accountants to the issue. They play a key role at all stages of the pre-listing period including the following: i The Accountants Report This is an essential part of the prospectus and covers such areas as the basic structure of the Group, (assuming there is more than one company involved) the accounting policies, the earnings of the Group over the previous three/five years, where applicable, the Groups assets and liabilities and other financial details. ii The Prospectus The accountants must ensure that all the financial information in the prospectus is recorded properly and in strict accordance with the facts and the law. iii Tax The accountants will be consulted frequently on the tax implications of the Group, particularly if a restructuring of the Group is necessary prior to listing. The importance and value of this contribution by the accountants to the flotation cannot be over-estimated. iv General

The auditors will often have significant input into the more general areas of the prospectus as well as on such matters as employee share option schemes and accounting policies. D. The Advocates The firm of advocates acting for the company advise on the re-organisations that occur when a company transfers to public status, including such matters as changes to the memorandum and articles, share capital, registration as a public company and so on. They will normally attend prospectus-drafting meetings and report on title to properties and any litigation and material contracts outstanding. In any legal agreement between the company and the Bank, such as the underwriting agreement, the advocates to the company represent the interests of the company and the selling shareholders. E. The Public Relations and Advertising Agents Depending on the public profile of the company planning entry to the market, a campaign to increase public awareness needs to be conducted throughout the period up to flotation. Advertisements in the different media may form a part of this campaign. One of the most important contributions to be made by the advertising and marketing agents, however, is the artwork and design of the prospectus and choice of media.

F. Valuation Reports Reports by professional valuers on the companys properties and other fixed assets such as plant and machinery and also reports by other specialists must be included in the prospectus. Cost of going public The cost of going public is heavy particularly if the issue is underwritten. Costs would include fees of the issuing house and underwriters, the sponsoring brokers fees, updated property valuations, auditors fees, printing and legal costs plus any extraordinary expenses that may be incurred in the flotation. A very rough guide to the costs of a new flotation is in the region of 5 10% of the capital raised. Naturally costs and fees may vary according to the parties involved, and the overall costs of the issue are normally paid out of the proceeds of the issue. These costs are tax deductible.