[2008-02-12]  Rid the Exchange of Physical Shares Policy Options
The Uganda Securities Exchange (USE) has come a long way in the last nine years it has been in existence.

With total market capitalisation, of locally listed companies, currently standing at Shs 1,600 billion, the exchange has given investors an alternative investment opportunity while listed companies have also got the opportunity to raise capital. The growth in the stock market notwithstanding, there is a still more room for improvement, especially in the management of share certificates.


The existing arrangement is that if you want to buy shares you approach a stock broker, using cash on demand, and if your bid is successful then the broker should pay the exchange within three days. On the other hand, the person selling the shares should also receive their money within five days.

But that is not where the story ends, from the point of view of the buyer. While holding a physical share certificate provides a certain level of comfort and satisfaction to the investor, it also comes with a number of inconveniences that could be avoided if the USE moved away from the current manual shares system to the use of electronic shares. I will highlight a few of the inconveniences related to the current system.

In the current system, the buyer has to get a physical share certificate for the company whose shares (s)he has bought. Each certificate has to be signed by authorised signatories who handle more paper work the more times the shares of their companies change hands. Adopting an electronic form of shares will no doubt lead to a significant reduction in the volume of paper work.

The holding of physical certificates comes with the risks due to theft of stocks and mutilation or loss of certificates. In the event that any of these risks occur, the unfortunate investor will have to bear the burden of obtaining duplicate certificates such as paying for advertisement in a gazette or newspaper. The electronic system will not have these risks. In Uganda there are also many investors who have never picked their share certificates and could end up losing track of their investments altogether.

In the current physical mode, investors have to wait for 30 to 45 days before receiving share certificates, during the waiting time the investor cannot sell her share. This is a long time in the fast paced world of shares which can easily expose the investor to opportunity cost due to delay in transfer.

I have ever had the misfortune of experiencing such a cost when I thought I needed to sell off a certain stock but my broker could not do anything for another two weeks because I did not yet have the share certificate. In the meantime the share was losing about Shs5 to Shs10 of its price every trading day. That was a very long fortnight for me. In the electronic environment, investors become legal owner of the securities once they are credited to the investors account with the Central Depository.

In the current physical certificates system, an investor who changes her address has to go through the process of changing the information with each company whose shares she is holding. In an electronic environment, however, investors have to only inform their broker with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.

I do not have to belabour the point; the Uganda Securities Exchange is now of age to institute an electronic shares system. I have also heard and read comments attributed to officials from the Capital Markets Authority and the Ministry of Finance alluding to plans to establish such a system. What is missing is the relevant law or laws to allow for the establishment and regulation of a Securities Central Depository System in Uganda.

The people concerned in the Ministry of Finance should expedite the process. Readers ought to know that both the Nairobi Stock Exchange and the Dar Es Salaam Stock Exchange are using electronic systems.


Source: Copyright © 2008 AllAfrica