Author:	Kenneth Mwenda LLB, BCL, MBA, PhD, DBA, FCI, FRSA World Bank
Subjects:	Securities Africa Securities Industry Africa Securities Law and Legislation
Issue:	Volume 7, Number 1 (March 2000)
Category:	Comment

Contents

• Introduction
• A Definition of Emerging Capital Markets
• The Emerging Lion Markets of Africa
• Constraints on the Development of Emerging Markets
• Threats of Monopolistic Tendencies On The Lion Markets Of Africa
• Poor Financial Reporting And Limited Access To Information
• Inadequate Liquidity
• Restrictive Regulations On Banking Systems
• Restrictions On Investment Of Pension Assets
• Privatisations And How They Have Influenced The Setting Up Of Emerging Capital Markets
• The Case for Emerging Markets
• Emerging Markets As A Fast Growing Part Of The World Economy
• Emerging Markets: Their Delivery Of Superior Returns And Their Potential For Further Diversification Of Global Portfolios
• Emerging Markets And The Attractive Valuation Of Equity Securities
• Developing countries represent huge marketplaces in the global economy
• Investment Opportunities In Under-represented Global Portfolios
• Other reasons supporting the case for emerging markets
• Relaxation Of Fiscal Barriers And Exchange Control Regulations
• Some Free Market Economy Policies
• Market Efficiency Of Emerging Markets
• The Integration of Emerging Markets as an Important Means to Overcoming some of the Constraints
• The case of Eastern and Southern Africa and the importance of setting up a regional stock exchange
• Political and Socio-Economic Factors
• Advantages Of Having A Regional Stock Exchange
• Proposals on How to Set Up a Regulatory Framework to Govern Public Distribution of Securities on the COMESA Stock Market
• Controlling Market Abuses On The Regional Stock Exchange
• Authorisation And Regulation Of Financial Intermediaries
• Information Disclosure Requirements
• Dispute Settlement And Promoting Securities Trade
• The Importance Of Having A Competitive Regional Financial Sector To Support The Development Of A Regional Stock Exchange
• Conclusion
• Notes

The chairman of the Nairobi Stock Exchange, Mr Jimnah Mbaru has said that 'African stock markets should integrate if they are to become efficient sources of investment capital. He said that with the exception of the Johannesburg Stock Exchange (JSE), bourses in Africa were too small and lacked liquidity. The JSE is Africa's largest and most vibrant stock market accounting for over 90 per cent of the total market capitalisation of sub-Saharan Africa and over 76 per cent for the entire continent. 'Integration will improve liquidity by providing a larger market from which to tap capital for investments. A workable option would be to combine forces at the regional level before the eventual creation of a single stock market for the continent with the JSE as the pivot,' he said.

Mr Mbaru said this last week at the University of Stellenbosch in Cape Town, South Africa, during an African investment conference. He spoke in his capacity as the chairman of the African Stock Exchanges Association. He proposed a new approach through which money could be channelled to private sector-managed pension funds for civil servants, teachers and members of the disciplined forces as a way of spurring the growth of stock exchanges on the continent. 'Pension funds are major players in capital markets. Private sector pension funds will ensure that contributors are free to participate in socio-econo-political reforms,' he said.

Mr Mbaru said that heightened competition would greatly disadvantage fledgling bourses on the continent and called on African countries to accelerate the liberalisation of the telecommunications sector to benefit from emerging trends such as electronic commerce. Globalisation had brought with it dangers, including volatile capital flows and unpredictable investor sentiment which had affected Africa. He cited the 1994 Mexican crisis and the Asian contagion as warning signs. He said that reforms on the political and economic fronts in Africa, had resulted in an improvement in real per capita growth from an average of 0.8 per cent in 1965 to two per cent currently and called for consolidation of the gains made. Stock exchanges must be on the frontline of economic reform, he said. The debt problem in Africa was grim with external debt hitting a peak of $228 billion, he observed, and urged the G7 industrialised countries to extend the Heavily Indebted Poor Countries (HIPC) initiative to cover other countries. 'Since the HIPC was launched in 1996, only six countries-three of them in Africa (Uganda, Cote d'Ivoire, and Mozambique) have benefited. Debt relief can only be useful if it is done in the shortest time possible,' he said. He called for banking sector reforms, the systematic development of long-term savings instruments and the bond markets as important planks in evolving more robust stock exchanges on the continent."
The Daily Nation Newspaper, Kenya Wednesday, November 3, 1999

Introduction

1. In light of the foregoing, this paper examines some of the constraints affecting the development of emerging markets in Africa and the world over. It is argued that whereas the attractiveness of emerging markets includes views such as emerging markets represent a fast growing part of the world economy; they have delivered superior returns; they provide further diversification of global portfolios; they are attractively valued; they represent huge marketplaces; and they are underweighted in global portfolios. The problems associated with emerging markets include the views that these markets experience constraints such as inadequate liquidity, restrictive regulations on banking systems, restrictive regulations on investment of pension assets and heavy reliance on privatisations as a source of capital growth. In general, however, the advantages of investing in emerging markets, when contrasted with the disadvantages of investing in these markets, show that there is a good case for investing in emerging markets.

2. As Porter observes: "Over the past few years, investor interest in the world's emerging markets has expanded significantly. This interest has been fuelled by the relatively high returns recorded by emerging markets and by their perceived potential for large returns in the future."[1]

3. Barry and Lockwood also note: "Emerging capital markets (EMs) recently have attracted the attention of global investors and scholars alike. The markets are characterised by high average returns, high volatility, and excellent diversification prospects in combination with portfolios from developed markets."[2]

4. In this paper, it will be shown that imperfect market conditions can affect the capital structure decisions of corporate investors in emerging markets. To overcome such problems, proposals are spelt out on the need for capital markets in Africa to integrate by moving towards the establishment of a regional stock exchange and the promotion of multiple listing and cross-border trade in securities.

   A Definition of Emerging Capital Markets

5. Generally, there is no universally accepted definition of emerging capital market.[3] In this work, the term 'emerging capital market' is used loosely to mean the same thing as 'emerging stock market'. We are mindful, however, of the fact that the term 'capital' could involve various combinations of debt and equity securities. Also, 'capital' could be constituted by equity securities only or by debt securities only. The same would be true if we were to examine the meaning of the term 'stock' as it applies in the context of the title 'emerging stock markets'.[4] The broadness and similarities in what constitutes stock and capital explain why we use such terms as 'emerging capital market' and 'emerging stock market' interchangeably. In the strict legal sense, however, the two terms are somewhat different. In practice, they are hardly distinguishable. Although there are other forms of capital markets, which by contrast are not stock markets, these markets fall outside the ambit of this work and they include institutions such as merchant banks. In this work, the type of capital markets that we are concerned with are emerging stock markets. In particular, we are concerned with Africa's emerging stock markets.

6. The International Finance Corporation (IFC) defines an emerging market as one which is found in a developing country.[5] By contrast, investors tend to focus their attention and investments on a more narrow definition than that emphasised by the IFC.[6] Investors generally focus their attention and investments on a definition that emphasises those developing countries in which capital markets are advancing in size, activity, or sophistication.[7] Interestingly, however, on the definition provided by the IFC, Barry and Lockwood observe:
   "It follows the World Bank's guideline that a developing country is one with low-to-middle income, which in 1992 meant a per capita GNP (Gross National Product) of less than US $8,356. The IFC maintains a database including security prices on 26 markets out of the 169 countries that qualified as low-to-middle income in 1992."[8]

7. The Economist publication (hereafter called the 'Economist'), by contrast, usually lists the following twenty-five countries as countries where emerging markets are located:[9]
   1. China
   2. Hong Kong
   3. India
   4. Indonesia
   5. Malaysia
   6. Philippines
   7. Singapore
   8. South Korea
   9. Taiwan
   10. Thailand
   11. Argentina
   12. Brazil
   13. Chile
   14. Colombia
   15. Mexico
   16. Venezuela
   17. Greece
   18. Israel
   19. Portugal
   20. South Africa
   21. Turkey
   22. Czech Republic
   23. Hungary
   24. Poland
   25. Russia

8. The criteria used by the Economist to arrive at the above list is somewhat unclear. Apart from the Egyptian stock market, that has just been added to the list recently, the Johannesburg Stock Exchange is the only other African stock exchange that has been listed down by the Economist as an emerging market. Other African stock exchanges are excluded. However, a good number of the stock markets listed as emerging markets by the Economist are located in the less affluent parts of continental Europe (such as Greece and Eastern Europe). The other markets listed by the Economist are located in the Far East and in Latin and South America.

9. Although it could be argued that the Economist does not regard Zambia, and many other African countries, as having markets at all, that view alone does not preclude us from analysing justifications, if any, behind the criteria used by the Economist. Indeed, as pointed out above, there is hardly any evidence to suggest the basis upon which the Economist determines what constitutes an emerging stock market. Such a feature cannot be over-looked as it sheds some light on how a number of theories on emerging markets are conceived.

10. Generally, there is an overlap between markets identified by some as 'emerging' and those identified by others as 'developed'. A good example are the classifications by the IFC and that by the Economist. The Economist classified as 'emerging' the markets of Taiwan, Korea, Mexico, South Africa, Malaysia and Thailand, all of which had year-end 1993 market capitalisations in excess of US $100 billion.[10] By contrast, the IFC classifies as 'developed' nine mostly European markets with capitalisations less than US $100 billion.[11] At the time that the IFC was compiling data on emerging markets and developed markets, Italy, one of the G-7 nations, had a smaller market capitalisation than five emerging markets.[12]

11. Clearly, there is need to have a well defined criteria on which the classification of emerging stock markets should be based. If such criteria were to be spelt out, perhaps, a number of African stock markets would qualify as emerging markets. The evidence presented above on Italy shows that in reality some emerging markets can be significant in size. However, given the volatility of business in these markets, it is difficult to say with precision which is or is not an emerging market. As a result of lack of clarity in the definition of emerging markets, we will take a departure from the restrictive lists provided by the Economist and the IFC. Instead, we will argue that the term 'emerging market' covers mainly stock markets in developing countries which have not yet developed to the same levels of sophistication and market capitalisation as stock markets in a number of developed countries.

    The Emerging Lion Markets of Africa[13]

    "The old collectivism, nationalisation and aid from Comecon (the association of Soviet-oriented nations) that most African states dashed for after independence in the Sixties has been shelved since the late Eighties in favour of privatisation and markets.

    A whole new batch of emerging markets has been launched in recent years on a continent that until now has only been represented by South Africa (which is often classed among 'European emerging markets')."[14]

12. In most of the literature on emerging markets, the lion markets of Africa are rarely listed alongside the tiger markets of the Far East or the puma markets of Latin and South America.[15] There does not seem to be any plausible explanation to justify the exclusion of some of Africa's stock markets from the category of emerging markets in the world. As one commentator has observed:

    "But the lion markets of Africa are now developing in such a way that investors interested in emerging markets can no longer ignore them. While South Africa remains bigger by far than all the rest put together, there are already 16 emerging markets in Africa and more on the way."[16]

13. Indeed, by July 1996, Senegal, Uganda and Tanzania had already signalled that they were planning to launch stock markets by the end of 1996.[17] The Tanzanian stock exchange was set up the following year. The following figures illustrate the growth in the number of stock markets in Africa and the growth in the business on these markets.[18] Also, appearing below is some information pointing to some of the top twenty players on Africa's lion markets.

     

    Performance of African Stock Exchanges as at 31 December 1997

     

    Country	Est.	As at 31st December 1997
    		No of listed companies	Market Capitalisation (US$ billion)	Historical P/E Ratio	Main Index
    Botswana	1989	12	0.6	10.5	708.49 (Dom. Comp. Index)
    Côte d'Ivoire(a)	1976	35	1.0	11.6	437.49 (INDICE BV)
    Egypt	1881	650	20.8	10.2	359.85 (Capital Market)
    Ghana	1990	21	0.3	5.7	511.74 (GSE All-Share)
    Kenya	1954	57	1.8	9.7	3115.14 (NSE 20 Index)
    Malawi	1995	3	0.1	6.4	137.57 (Malawi Share Index)
    Mauritius	1989	40	1.6	18.0	391.12 (Senidex)
    Morocco	1929	49(a)	8.9(b)	15.9(a)	n/a (Upline Secur. Ind.)
    Namibia	1992	33	0.7	11	225.9 (NSE All Share)
    Nigeria	1960	182	3.0	9.8	6440.51 (NSE All-Share)
    South Africa	1887	642	234.4	n/a	6202 (JSE All-Share)
    Sudan(c)	1995	34	0.5	n/a	n/a (n/a)
    Swaziland(b)	1990	4	0.4	n/a	14.05 (SSM Index)
    Tunisia(c)	1989	30(b)	4.0	n/a	n/a (General BVM Index)
    Zambia	1994	7	0.2	7.2	210.7 (LuSe All Share)
    Zimbabwe	1896	66	2.1	13.0	7196.43 (Industrial)

    Source: Internet web page of stock exchanges in Africa as at 6^th December, 1999 -
    http://mbendi.co.za/exaf.htm

    Performance of African Stock Exchanges as at 31 December 1997

    Country	Est.					1996	1997 1997 1997			Annualised Liquidity (%)
    						% Mkt Change (US$ returns)	% Mkt Change (US$ returns)	Trading Values (US$ million)	Trading Volume (mn of shares)
    Botswana	1989					(18.2)	92.6	58	61	9.5
    Côte d'Ivoire(a)	1976					30.3*	n/a	20	0.6	2.0
    Egypt	1881					n/a	n/a	6,257	7,193	30.0
    Ghana	1990					(8.1)	11.2	45	126	4.0
    Kenya	1954					(8.7)	12.7	98	144	5.4
    Malawi	1995					12.5	(2.7)	0.6	33	0.5
    Mauritius	1989					0.8	(10.4)	135	164	8.0
    Morocco	1929					36.3*	n/a	885(c)	14.3(c)	15.0(c)
    Namibia	1992					35.8	4.7	n/a	n/a	0.6 **
    Nigeria	1960					49.1	(7.0)	138	1312	3.6
    South Africa	1887					(15.9)	(12.2)	42,975	1,403	18.3
    Sudan(c)	1995					n/a	n/a	3.5	113.7	8.0
    Swaziland(b)	1990					46.7*	n/a	2.2	3.3	0.5
    Tunisia(c)	1989					n/a	n/a	684(c)	21(c)	17.2
    Zambia	1994					12.5	88.2	9	270	1.2
    Zimbabwe	1896					91.6	(53.2)	317	1,197	18.1

    [With the exception of South Africa, figures exclude multiple-listings (for instance if one includes Ashanti Goldfields, Ghana's market capitalisation is US$1,106 million) but the latter are included in the number of listed companies. US$ returns and P/E ratios are weighted. For Côte d'Ivoire, Egypt, Morocco and South Africa, P/E ratios were compiled somewhat earlier than December 1997 and thus are not readily comparable. Same comment applies to market capitalisation for Morocco and Tunisia. * in local currency ** including multiple-listings (a) figures as at mid-1997. (b) 1996 figures. (c) 1995 figures].

    Source: Internet web page of stock exchanges in Africa as at 6^th December, 1999 -
    http://mbendi.co.za/exaf.htm

    
    

    Lion Markets of Africa: Their Capitalisations and Quoted Companies, as at July 1996

    Country	Quoted Companies	Market Value
    Botswana	12	£260m
    Egypt	718	£4.3bn
    Ghana	18	£1.3bn
    Ivory Coast	31	£562m
    Kenya	56	£1.2bn
    Malawi*	-	-
    Mauritius	39	£1.2bn
    Morocco	44	£4bn
    Namibia**	21	£8.4bn
    Nigeria	182	£1bn
    South Africa	646	£165bn
    Sudan	34	£30m
    Swaziland	4	£220m
    Tunisia	21	£2.6bn
    Zambia	8	£300m
    Zimbabwe	65	£1.4bn
    *Just starting. **Local quotes include Standard Bank of South Africa.

    Source: Nedcor Securities, The Stock Markets of Africa, (London: Nedcor Securities, 1996), quoted in Evening Standard Newspaper (UK), Thursday, 11th July 1996 p. 35.

    Twenty Top Players On The Lion Markets, as at July 1996

    Company	Country	Business	Market Value
    Ashanti Goldfields	Ghana	Mining	£1.1bn
    Delta Corporation	Zimbabwe	Drinks	£280m
    Barclays Kenya	Kenya	Banking	£190m
    Zambia Sugar	Zambia	Sugar	£130m
    ZCCM	Zambia	Mining	£125m
    Bindura Nickel	Zimbabwe	Mining	£115m
    Brooke Bond Kenya	Kenya	Food	£110m
    Standard Chartered	Kenya	Banking	£100m
    BAT Kenya	Kenya	Cigarettes	£90m
    Kenya Commercial Bank	Kenya	Banking	£85m
    Barclays Zimbabwe	Zimbabwe	Banking	£85m
    Zimbabwe Sun	Zimbabwe,	Restaurants, Hotels	£82m
    Hippo Valley	Zimbabwe	Food	£82m
    Bamburi Portland	Kenya	Building Materials	£70m
    Biohom Ivory Coast	Ivory Coast	Food	£70m
    Sechaba	Botswana	Beer	£65m
    Nigerian Breweries	Nigeria	Beer	£65m
    Nestle-CI	Ivory Coast	Machinery	£60m
    Total Kenya	Kenya	Oil	£60m
    Firestone (EA)	Kenya	Tyres, rubber goods	£58m

    Source: Nedcor Securities, The Stock Markets of Africa, (London: Nedcor Securities, 1996), quoted in Evening Standard Newspaper (UK), Thursday, 11th July 1996 p. 35.

    Constraints on the Development of Emerging Markets

14. Given that there is no universally accepted definition of emerging markets, these markets vary widely in terms of their structure, performance, prospects and principal features. In 1984, Gupta undertook a study on the role that the structure of financial markets plays in a number of developing countries.[19] His findings indicated that financial markets have sometimes encouraged development and at other times have resulted from development. A similar study was undertaken by Barry in 1986 on Hong Kong, Korea, Singapore and Taiwan and it revealed the same findings.[20] In trying to appreciate all these studies, we must bear in mind some of the constraints affecting the efficacy of the legal framework(s) for public distribution of securities in emerging markets.

    Threats of Monopolistic Tendencies On The Lion Markets Of Africa

15. It is now feared that many local companies on Africa's lion markets will not be able to compete favourably with such giant conglomerates as the South African Anglo-American Corporation Ltd and De Beers Ltd.[21] Compared with the market values of each of the top players on the lion markets of Africa, the market value of Anglo-American Corporation (alone), by 1996, was tagged at UK£9 billion and that of De Beers at UK£7 billion.[22]

16. In Zambia, there are strong indications that Anglo-American Corporation Ltd., which previously owned most of the shares in the copper mining companies prior to the government take-overs,[23] is likely to buy most of the shares in Zambia Consolidated Copper Mines Ltd (ZCCM Ltd) that is now being privatised.[24] Shares in ZCCM Ltd are cross-listed on the Lusaka Stock Exchange, the International Stock Exchange in London and the Paris Bourse.[25] Shares in ZCCM Ltd are also traded on the secondary market in the United States in the form of American Depository Receipts.[26]

17. Generally, the lion markets of Africa appear set for faster growth now that privatisation of state owned enterprises in a number of African countries is underway. Indeed, price-earnings multiples[27] have fallen from three figures to single figures since proper stock exchanges where launched in countries such as Zambia, Zimbabwe, Egypt and Nigeria.[28] This provides opportunities for foreign investors to invest in Africa. Foreign investors can penetrate the lion markets of Africa through a number of strategies. As one commentator observes:

    "... there are three ways for British investors to get into Africa outside South Africa. They can buy a British company focused there such as Lonrho, which is currently planning a three-way split to float off its Lonrho Africa trading, sugar and newspaper arms. They can invest through well-established funds like Barings Simba Fund, GT Africa Fund or Trans Zambezi Investments, which are all pledged to limit South African shares to a minority of their holdings...Or they can buy shares direct through London or local brokers such as Nedcor."[29]

    Poor Financial Reporting And Limited Access To Information

18. Barry and Lockwood observe:

    "In many developing nations, security markets are either lacking entirely or are poorly developed. Further, financial reporting may be unreliable and access to company information highly limited. In such nations, banks and other financial intermediaries take on especially important roles. In order to secure investment capital from banks, firms often must concede a strong role for the lenders, such as presence on the Board of Directors and access to inside information. In a market in which asymmetric information is especially problematic, the market can break down altogether without some way in which providers of capital can gain access to information and a degree of control."[30]

19. The unique environment in which emerging markets find themselves necessitates the adoption of a novel approach to the study of capital structuring (by companies) in emerging markets. Restrictions on investment behaviour such as those described above can adversely affect the market value of a company[31] while at the same time placing a limit on possible streams of debt financing available to companies. Such market imperfections can influence the choice between debt financing and equity financing on an emerging market. Indeed, a number of African, Asian and Caribbean countries have been said to experience such problems.[32]

    Inadequate Liquidity

20. Another illustration of market imperfections in emerging stock markets is that these markets (e.g. the Lusaka Stock Exchange) are relatively illiquid[33] and are heavily regulated.[34] How does a company raise its finance on such a market? Under the 'traditional' view of capital structure, it is the level of leverage[35] that forms an important factor in determining the overall cost of capital[36] and the total market value of a company.[37] As the level of leverage increases over moderate debt ranges, the average cost of capital falls because of the lower cost of debt capital compared with equity capital.[38] This helps to explain some of the reasons behind decisions of companies, whether to make fresh issues of shares to the public (e.g. through public distribution of equity securities on the stock exchange), use debt finance as an alternative source of corporate finance, or have a rational mix of both debt and equity finance. Under the traditional view:

    "It was assumed that moderate amounts of debt did not add significantly to the risks attached to holding equity, so that initially the company would not have to offer higher returns to its shareholders. This would cause the weighted-average cost of capital to decline, thus increasing the value of the company. As the proportion of debt in the capital structure rises, two things happen: first, the equity shareholders realise that their investment is becoming riskier and therefore demand a higher rate of return from the company; second, lenders advancing to an already geared company will also recognise increasing risk on their investment as the level of gearing rises and expect a higher rate of return on succeeding tranches of debt advanced."[39]

21. Despite claims by the traditionalists that the overall cost of capital is initially reduced by introducing debt into the capital structure,[40] it is clear that as the level of debt increases the total cost of capital no longer decreases.[41] Instead, it eventually begins to rise again at higher levels of debt.[42] Views have been expressed that if the traditional view of capital structure is accepted, then there is a level of gearing for each firm at which the cost per unit of capital is at its lowest point.[43]

    "Managers would therefore have to identify this optimum level of gearing and ensure that their company maintained its capital structure at this level. There does seem to be an element of irrationality in the traditional view in that equity shareholders are expected to ignore an element of risk. It is questionable whether investors would be prepared to accept the same rate of return from companies in similar industries with different levels of gearing. In fact, this lies at the heart of the Modigliani and Miller (MM) analysis ..."[44]

    Restrictive Regulations On Banking Systems

22. Other market imperfections in emerging markets include matters such as developing countries imposing constraints on their own banking systems. Here, high reserve requirements or strong restrictions on where banks must place their reserves have been promulgated by many developing countries.[45] As Barry and Lockwood observe:

    "In Mexico in the mid-1980's, for example, banks were required to maintain over 70% of their assets in Mexican government securities. At an extreme, such restrictions and limits can lead to the development of large informal credit markets."[46]

23. Similarly, a number of African, Asian and Caribbean countries have been noted to be experiencing such problems.[47] In many other developing countries, however, informal credit markets have been a major source of funds and they often exist to enable investors to avoid financial reporting and related costs such as taxation.[48] Furthermore, informal markets develop in response to cultural traits, such as the desire that a family be viewed as self-sufficient because it runs an informal credit market or it has easy access to such a market.[49] In the case of Zambia, like in many other developing countries where institutions such as venture capital funds are relatively new,[50] the issue whether banks have been providing loans to companies intending to buy shares on the Lusaka Stock Exchange or if such companies have had access to informal credit markets raises interesting questions. I have examined elsewhere some of these issues.[51]

    Restrictions On Investment Of Pension Assets

24. In many developing countries, the investment of pension assets is highly restricted.[52]

    "For example, investment may be limited to local government securities... pension assets are limited to domestic investment because a goal of the plan is to aid in the mobilisation of capital sources to support the nation's growth. When such restrictions are imposed, they increase the risks faced by workers because the domestic economies in many developing nations are very narrow and are exposed to high local market risk. Thus, an explicit trade-off is enacted between the needs of the nation for capital on the one hand and the desire to reduce pension-holder risk on the other."[53]

25. Again, countries such as Nigeria, Zambia, Uganda and India have been noted as experiencing such problems.[54] Some Caribbean countries, however, seem to have taken a pragmatic approach by permitting a certain percentage of pension funds to be invested in other portfolio in order to maximise investment returns.[55] Indeed, the case of the Caribbean shows that investment of the larger part of pension funds is confined to risk-free government securities while a small fraction of these funds can be invested in risky portfolio abroad or within the Caribbean countries.[56]

    Privatisations And How They Have Influenced The Setting Up Of Emerging Capital Markets

26. Writing on the London Stock Exchange, Briston observes:

    "It is clear that the Stock Exchange developed in order to meet two demands. First, the increased issue of securities of a long-term or permanent nature required a market for the purchase and sale of these securities, so that their holders could liquidate their investments in the short-term. Also the expansion of industry during the nine-teenth century necessitated the discovery of new sources of finance. One of the main such sources was the Stock Exchange... The two major functions of the Stock Exchange are thus the provision of a market for the purchase and sale of securities and the provision of capital for the purposes of industry and Government, both central and local."[57]

27. Stapley also observes that the stock exchange plays two vital, inter-linked roles within a country's economy.[58] These roles are to enable government and industry to raise capital with comparative ease and to provide a secondary market where existing investors can sell and where prospective investors can buy.[59] However, in contrast to the development of a number of advanced stock markets, the growth of many emerging markets has been triggered by the need for developing countries to undertake privatisation programmes.[60] A number of goals have been identified as objectives of the privatisation process in developing countries.[61]

    "One goal is maximum economic efficiency of the resulting enterprises. A second goal may be to raise revenues for the state to address deficits. Another goal in the case of newly open economic systems is to permit the people of the nation to participate in ownership. A fourth goal is to establish an active secondary market for securities. The various goals suggest alternative mechanisms for the privatisation of enterprise. For example, an auction process in which the enterprise is sold to the highest bidder would tend to lead to ownership by the organisations best equipped to operate the entity and would tend to maximise the price of the assets sold. But it would also tend to exclude from ownership most of the people of the nation, and it has often been met with charges of favouritism or corruption."[62]

28. Generally, the privatisation of state owned enterprises in many countries has been approached differently. Each country's approach has been determined by various factors such as country-specific needs and conditions. The path followed for privatisation of state owned enterprises in Eastern Europe, for example, has been a function of political concerns as much as of economic concerns.[63] Ultimately, the key element of the privatisation process in Eastern Europe has been the provision for active shareholder groups.[64] In Africa:

    "According to World Bank data, of the 6,430 state owned enterprises before 1990, 3,840 (or over half) had been privatised by the end of 1996. Although complete figures for the proceeds are not available, at least US$ 2.7 billion was realised.
    These figures tend to disguise some of the serious obstacles encountered in the privatisation process: political resistance, technical problems and the lack of sufficient domestic and international finance.
    Zambia, often cited as an example by the World Bank, is a case in point ..."[65]

29. In Zambia, and many other African countries, suffice it to say that the introduction of a stock exchange was primarily targeted at facilitating the privatisation of state owned enterprises.[66]

    The Case for Emerging Markets

30. Traditionally, emerging capital markets in Africa, Asia and Latin and South America were seen as 'mini-markets' or 'little casinos'.[67] We have shown above statistics on the market capitalisation of most of Africa's stock markets. The figures indicate that a number of African lion markets can no longer be thought of as 'little casinos'. Following below are two charts showing firstly, the growth of emerging markets world wide, in terms of market capitalisation (i.e. US$ billions), and secondly, the performance of emerging markets matched with that of developed stock markets, in terms of growth in GDP.

    Eleven Years' Growth of Emerging Markets

    

    Source: International Finance Corporation, quoted in M.T. Porter, "Closed-End Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, The World's Emerging Stock Market, (Chicago: Probus Pub. 1993), p. 460.

    Emerging Markets Versus Major Markets Year End 1990

    

    Source: International Finance Corporation, quoted in M.T. Porter, "Closed-End Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, The World's Emerging Stock Market, (Chicago: Probus Pub. 1993), p. 461.

31. The second chart shows that taken together, emerging markets are bigger than the markets of Germany, France and Canada. Investors are gradually turning their attention to this increasingly important asset class.[68] Porter identifies six main reasons which explain why emerging capital markets are seen as attractive by investors, namely that they:[69]

    • represent a fast growing part of the world economy;

    • have delivered superior returns;

    • provide further diversification of global portfolios;

    • are attractively valued;

    • represent huge marketplaces; and

    • are underweighted in global portfolios.

    We will now address each of these reasons in turn.

    Emerging Markets As A Fast Growing Part Of The World Economy

32. Between 1965 and 1989, the average growth rate of developing countries was recorded at 4.7 percent whereas that of developed countries was 3.1 percent.[70] The disparity in growth rates indicates that one of the main reasons for investors choosing to invest in securities in emerging markets is that such markets offer the potential strength of corporate earnings.[71]

    Emerging Markets: Their Delivery Of Superior Returns And Their Potential For Further Diversification Of Global Portfolios

33. The second reason why investors are interested in investing in securities on emerging markets is that these markets are known to have delivered superior returns.[72] The markets offer potential high returns and empirical evidence suggests that generally emerging markets have outperformed developed markets over-one, two-, five-, and ten-year periods.[73] Certainly the performance of a number of Tiger markets in the Far East, prior to the mid-1990 financial crisis, is a notorious fact of how emerging markets have been able to deliver superior returns. Closely related to the second point is the potential that these markets have to provide further diversification of global portfolios.[74] Again, the tiger markets provide a good example. Generally, emerging markets have exhibited above-average returns with enormous volatility individually, yet these markets have shown low correlations with the United States market and with each other.[75] This explains the importance of investing not only in securities on developed markets, but also in securities on emerging markets.

    Emerging Markets And The Attractive Valuation Of Equity Securities

34. Besides having good growth characteristics, emerging markets offer attractive equity valuations when measured by the yardsticks used in developed markets, such as price-to-earnings and price-to-book value ratios.[76] Research also shows that by the end of 1990, as a percentage of Gross Domestic Product (GDP), capitalisation of the 20 largest emerging markets was 32 percent compared with 50 percent - 60 percent for developed countries.[77]

    Developing countries represent huge marketplaces in the global economy

35. This feature explains why the World Bank projects that:

    "...by the year 2025, 85 percent of the world's population will reside in developing countries. Yet, industrialised countries account for 74 percent of the world's GDP. Developing countries will have huge markets to be satisfied. It is forecast that much of LDC economic growth will be domesticated - not export based."[78]

36. A view has been expressed too that many large Third World countries, including India, Brazil, and China will not need to export to grow.[79]

    Investment Opportunities In Under-represented Global Portfolios

37. In general, emerging markets are underrepresented in global portfolios.[80] As Porter observes:

    "...emerging markets' share of world GDP is 12 percent, but they account for only 5 percent of world market capitalisation. This gap is likely to narrow over time because domestic demand - not foreign demand - traditionally has been the force behind the past performance of developing stock markets. As global investors become aware of the tremendous opportunities in Third World Markets, the flow of new equity from capital exporting countries such as Japan should increase."[81]

    Other reasons supporting the case for emerging markets

38. In addition to the reasons provided by Porter, other factors which make emerging markets attractive to foreign investors include the following:

    Relaxation Of Fiscal Barriers And Exchange Control Regulations

39. The argument for potential growth of emerging markets is further buttressed by the fact that the liberalisation of economies in developing countries and the relaxation of foreign investment barriers (such as tax laws and exchange control regulations) could attract investments which might trigger the expansion of stock markets in developing countries. For many developing countries, the main focus in attracting private capital is foreign investment.[82] This is evidenced mainly by the relaxation of a number of barriers to foreign investment in countries such as Zambia and Kenya.[83]

    Some Free Market Economy Policies

40. Developing countries are overcoming historical objections to foreign investment by increasingly beginning to appreciate the benefits of open markets and private initiatives.[84] Many are recognising that equity markets are integral to economic development and that foreign investment can act as a source of long-term capital. This trend should continue as long as the world's commercial banks consider themselves overextended in developing countries.[85]

    "Chile, for example, has shown what a Latin American economy can do if free enterprise is given a chance and state controls are dismantled. It has converted foreign debt to equity, encouraged development of private pension funds, and amended tax laws to provide greater investment incentives. As a result, the country has enjoyed strong growth since 1985. Mexico, Turkey and Brazil are examples of countries that have opened up and seen their stock markets surge."[86]

    Market Efficiency Of Emerging Markets

41. Most of the market efficiency tests that have been carried out on emerging markets indicate that these markets do not fall into the category of weak-form market efficiency.[87] Besides, despite some of the constraints affecting the efficacy of the legal framework(s) for public distribution of securities in emerging markets, these markets cannot by that fact alone be said to be inefficient. Some of these constraints may indicate, instead, that the asset pricing models on which these tests are based are inadequate.[88] Indeed, a number of studies undertaken on the market efficiency of emerging stock markets show, for example, that the pricing mechanisms of these markets are usually affected by the volume of trade in securities on a particular day or in a particular season.[89]

42. There are limited similarities between the seasonalities in developed country stock markets and that in emerging stock markets. The reason for this view is simple. Emerging stock markets, like developed country stock markets, have their distinct institutional characteristics. Also, emerging markets are relatively segmented and until recently, have not been adequately integrated with each other and with developed country stock markets. This feature helps to explain why the financial crisis of the far East in the mid-1990's had little impact on the lion markets of Africa. However, in order to integrate Africa's emerging markets there is need to move towards promoting multiple listings and cross-border trade in securities.

    The Integration of Emerging Markets as an Important Means to Overcoming some of the Constraints

43. Having made a case for the attractiveness of emerging markets and having identified some of the constraints facing the markets, we submit that a possible solution to overcoming these constraints lies in the integration of the markets. It was observed this year - 1999 - that (see, http://mbendi.co.za/exaf.htm):

    "Stock exchanges in Africa are less developed than in other areas of the world, as one would expect from emerging markets. The African Capital Markets Forum and the African Stock Exchanges Association are organisations which are dedicated to the development of stock exchanges in the continent. Members of the African Stock Exchanges Association have agreed to set common standards for listings, education and, where possible, clearance and settlement of share deals. They also plan to use the Internet to publicise themselves and to sell Africa as an investment prospect to the world. Some of the problems (many of which are inter-related) preventing African stock exchanges from flourishing are:
    

    • unfavourable macroeconomic and/or political environments and/or unfavourable tax regimes
    • restrictive foreign exchange controls
      
    • lack of cultural exposure to share ownership, and the lack of individual savings to buy shares
      
    • lack of sophistication, compared with the exchanges in more developed continents
      restrictive stock exchange membership regulation
      
    • restrictions on foreign portfolio investment
      
    • insufficient protection of smaller investors from practices such as insider trading
      
    • lack of liquidity. Developments which should remedy the liquidity problem in time are the liberalisation of foreign exchange controls, minimising restrictions on foreign portfolio investment, the change-over to electronic trading (already accomplished on the several exchanges) and the privatisation of parastatal companies.

    
    Ghana was the best performing market in 1998, surging early in the year but retracing some of these gains with the emerging market crisis in August. Botswana withstood the currency volatility well with the local stock exchange rising by almost 15% in 1998. Zambia, Zimbabwe and Namibia were at the lower end of the scale. Zimbabwe's market suffered from persistent political problems and the severe depreciation of the ZWD. In Zambia, the problem was the lack of closure on the privatisation of ZCCM. Namibia suffered from both the unlucky fortunes of the ZAR and the once-off adjustment of switching over to the JET electronic trading system. Malawi had a very successful year - the number of listed stocks doubled and the MSE index rose by 60% in local currency terms. However, US$ returns were severely affected by the currency depreciation in August."

44. Overall, emerging markets in the world are becoming more integrated with global capital markets over time.[90] The reasons for this development vary from the size, structure and activity of the markets to the pricing characteristics of these markets. Emerging markets are also likely to become more integrated as they remove capital market restrictions. These restrictions are of many sorts and, as already noted above, they include restrictions on foreign ownership of shares[91] and restrictions on investment of pension assets.[92] With this in mind, a case is now made out for the setting up of a regional stock exchange in Eastern and Southern Africa.

    The case of Eastern and Southern Africa and the importance of setting up a regional stock exchange

45. It has already been established that emerging markets face a number of constraints which include, inter alia, inadequate liquidity and the limited integration of these markets. Such constraints are correlated to the efficiency of the markets. Equally important is the correlation between these constraints and the regulatory framework for public distribution of securities. For example, where a market lacks depth[93] it is not easy to appreciate the extent to which a relatively 'untested' regulatory framework contributes to the development of a competitive stock exchange. It is argued therefore that the introduction of a regional stock exchange in the Common Market for Eastern and Southern Africa-COMESA-and the promotion of multiple listings and cross-border trade in securities would facilitate the development of more efficient and competitive capital markets in the region. This would help to ease the liquidity problem on markets such as the Lusaka Stock Exchange.

    Political and Socio-Economic Factors

46. Generally, the Eastern and Southern African region is politically and economically weak. Civil wars have been going on in Rwanda, Burundi and the Democratic Republic of Congo. Various states in the region are now divided on how to resolve this problem. The fragmentation in the collective will of states in Eastern and Southern Africa makes the setting up of a formal stock exchange a much more attractive idea than that of having an informal regional stock exchange. Indeed, we are faced with a situation where the social and economic interests of several states are widely divided, and the momentum to galvanise a collective will is almost non-existent. Therefore, to promote efficient and effective securities regulation in this region, a regulatory system that does not lead to a 'lawless' situation must be put in place. In this context, a more centralised approach to regional financial integration should be adopted.

    Advantages Of Having A Regional Stock Exchange

47. In order to stimulate increased liquidity on markets in Eastern and Southern Africa measures such as multiple listings and cross-border trade in securities must be encouraged. The introduction of a regional stock exchange that co-exists with national stock exchanges would be a step forward towards stimulating increased liquidity on these national markets. Indeed, cross-listings are likely to take place both on the regional stock exchange and the national stock exchanges. However, in moving towards a regional stock exchange, Eastern and Southern African states must consider the prospects of harmonising their monetary and fiscal policies.[94] Also, there is need to develop and improve the information technology obtaining in the region.[95] Ideally, economies of scale and competitive capital markets could result from the establishment of a regional stock exchange. It is hoped that increased market liquidity under an effective regulatory framework can then bring about market transparency on the regional stock exchange.

48. Our proposal to have a regional stock exchange established in Eastern and Southern Africa is an important and original contribution of this work to the field of knowledge under investigation. We are not advocating for the setting up of a regional stock exchange that must replace the existing national stock exchanges in the region. By contrast, we are arguing that both the regional stock exchange and the national stock exchanges must co-exist so that the national stock exchanges can accommodate listings of company and government securities that cannot meet listing costs on the regional stock exchange.[96] Ideally, it is submitted that securities that must be listed on a regional stock exchange should be those of highly capitalised companies or companies that attract a lot of investment. Given this view, we submit further that for smaller companies that have a lower capitalisation, such a listing requirement would prove costly. Indeed, since smaller companies are often not highly capitalised and their market share, in terms of attracting investment, is usually small, these companies would be better off if they traded on listed or unlisted securities markets of national stock exchanges. Alternatively, smaller companies could trade their securities off securities markets by using such methods of distribution as pre-emption rights issues and bonus issues.

49. The establishment of a regional stock exchange in Eastern and Southern Africa would be a step forward towards the integration of Africa's emerging capital markets. In general, the integration of Africa's markets could be achieved not only through cross-listings,[97] but also through improved communications to facilitate effective co-ordination between the regional stock exchange and the national stock exchanges, and also between the respective national stock exchanges. The position of the United Kingdom provides a helpful example:

    "... the Stock Exchange (UK) does not have a monopoly of trading in securities. Section 37 and Schedule 4 to the Financial Services Act 1986 gives the Secretary of State a general power to recognise 'investment exchanges' which meet the criteria of the Act and so permit them to operate in this country... In addition, securities of large companies may be quoted on exchanges in other countries as well as in London, so that those other exchanges may provide competition for the Stock Exchange. Indeed, within the European Community it is sometimes feasible for a British company to list only on an exchange in another Community country."[98]

50. We are, however, mindful of some of the political, economic, technological and social impediments that could hinder progress on regional economic integration in Southern and Eastern Africa. Adding to this list are constraints that have already been identified in the earlier sections of this paper. The idea behind setting up a regional stock exchange must be understood as an integral part of the political and economic integration of Eastern and Southern African states. Separating the idea of a regional stock exchange from that of regional integration in general would not only make it difficult to set up a regional stock exchange, but would also slow down the pace and degree of regional integration in Eastern and Southern Africa. Indeed, the financial, banking and monetary sectors of various states in Eastern and Southern Africa must integrate if the region is to have economic power and independence. All in all, the setting up of a regional stock exchange must be preceded by thoughtful consideration of the various levels of regional integration reached by the regional integration schemes in Eastern and Southern Africa.[99]

    Proposals on How to Set Up a Regulatory Framework to Govern Public Distribution of Securities on the COMESA Stock Market

51. It is the view of COMESA that cross-border investments would be facilitated by the creation of a common investment code to encourage the movement of capital and dividends.[100] This common investment code, together with the municipal laws of COMESA Member States, can provide legal rules on securities regulation at the regional level. Provisions of this code must take precedence over municipal laws of COMESA Member States. Indeed, matters such as cross-border insider dealing can be dealt with in a much easier way if laws such as the common investment code were adopted.[101]

    Controlling Market Abuses On The Regional Stock Exchange

52. If, for example, a party resident in country X, a COMESA Member State, commits the wrong of insider dealing (assuming that insider dealing is a civil wrong here) on a national stock exchange of country Y, another COMESA Member State, judgement must be sought in the courts of country Y and then enforced in country X. In situations such as these, the execution of a multilateral regional treaty would facilitate the enforcement of foreign judgements.[102] The same analogy applies to judgements or decisions relating to civil wrongs committed on the regional stock exchange. However, a major problem arises where insider dealing is treated as a criminal offence. Can the concept of enforcement of foreign judgements apply to criminal law too? The concept of enforcement of foreign judgements would not be easy to apply to criminal law mainly due to differences in the criminal legislation of COMESA Member States and also due to the high standard of proof required in criminal cases generally. To overcome this problem, we propose that the common investment code must provide that if a criminal offence is committed on the Eastern and Southern Africa regional stock exchange or on a foreign national stock exchange within the region, the courts of the home state of the offender must try the offender where:

    • the offence is one which cannot lead to extradition;[103]

    • the conduct of the offender also constitutes a crime under the
      laws of the offender's home state; or

    • the home state of the offender refuses to extradite the offender
      on grounds of preservation of state security or public interest.

53. We suggest further that the common investment code should include measures to address situations where the home state of the offender, acting in breach of the common investment code, decides not to extradite the offender to a state which has the jurisdiction to try the offender. Provisions of the Vienna Convention on 'The Law Of Treaties 1969' must apply to the common investment code. Under Article 60 of the Vienna Convention, a material breach, such as a violation of a provision essential to the accomplishment of the object and purpose of a particular treaty, can enable all parties to the treaty, by unanimous action, to terminate the treaty altogether or to terminate it for the defaulting state only. Also, under Article 60 a single state which is specifically affected by a material breach may suspend the multilateral treaty between itself and the defaulting state, or any single state (not including the defaulting state) may suspend the treaty for itself entirely if the treaty is such that a material breach by one state radically alters the obligations under the treaty for all states.[104]

54. An alternative system would be to provide in the common investment code that a docket can be opened in the state where a criminal offence has been committed. The docket is thereafter sent to the courts of the home state (or country of residence) of the accused so that the accused can face trial there. Again, if this system were to be adopted, we propose that provisions of the Vienna Convention On The Law Of Treaties 1969 must be made applicable to the common investment code.

    Authorisation And Regulation Of Financial Intermediaries

55. The Eastern and Southern African regional investment code must also specify that parties intending to trade on any stock or securities exchange in the region must not only comply with the rules and regulations of the regional stock exchange, but must be authorised as well to conduct securities business in their home countries. This rule must be extended to parties who are from non-member states of COMESA and who intend to deal in securities on the regional stock exchange and/or in securities on any national stock exchange within Eastern and Southern Africa. The onus must be placed on the regional competent authority (for regulating securities trade on the Eastern and Southern African regional stock exchange) to maintain liaison with other competent authorities so that players from non-member states of COMESA do not break the law.

56. If parties from non-member states, who are resident abroad, break the law, the competent authority in their home country must be contacted so that the culpable parties face disciplinary action. The competent authority in Eastern and Southern Africa must be satisfied that the measures meted out to culpable parties by competent authorities in other countries is satisfactory. If not, the Eastern and Southern African competent authority must exercise reasonable discretion, under the code, to bar the culpable parties from dealing in any securities on a particular stock exchange or in securities on all stock exchanges within the region. Also, persons residing within the region who cooperate with such law offenders must face disciplinary action by having their securities removed from the securities market of the regional stock exchange. Powers and duties of the regional competent authority must supersede and have precedence over those of the national competent authorities.

    Information Disclosure Requirements

57. Turning to information disclosure provisions on matters such as listing particulars and company prospectuses, we submit that the common investment code must be drafted in such a way that it endeavours, as far as possible, to strike a balance between the various securities laws of COMESA member states. The common investment code of COMESA must be viewed as a 'compromise' document. Areas of common interest must be identified and codified into provisions of the common investment code. Indeed, where a company is listing for the first time on the regional stock exchange and that company's securities are not listed on any other stock exchange (i.e. where there is no cross-listing), the listing requirements that must be met by such a company must be more stringent than where a company is cross-listing on a regional stock exchange.

58. The reasons for this submission are mainly twofold. First, preparing information is costly, and secondly, the process of preparing information need not be repeated in toto where an investor has already made detailed disclosures on another market. Prospective investors trading on the regional stock exchange can have access to the earlier information on the company by requesting for such information from the company. The common code must place legal obligations on the company to disclose information released on another market where such information is being requested by an investor. Also, the common code must provide for continuing disclosure obligations on all companies whose securities are listed on the regional stock exchange. Continuing disclosure obligations would protect investors where, for example, information disclosed on another stock market is no longer up to date. As in the case of many national stock exchanges, the regional stock exchange must be permitted to have listed and unlisted securities markets. Similar considerations that underlie the establishment of these market structures at national level, underlie our proposal for such structures on the regional stock exchange.

    Dispute Settlement And Promoting Securities Trade

59. Overall, the common investment code must be binding on all COMESA Member States and it must be adopted in the legislation of the Member States. Such an approach would enable the courts of law in the COMESA Member States to apply regional law with less difficulties. Disputes on public distribution of securities on the regional stock market could be settled by an administrative body established pursuant to provisions of the regional investment code, with a right of appeal being allowed to the COMESA Court of Justice.[105] National courts must be obligated to enforce awards made by the COMESA Court of Justice. Besides, a regional securities regulatory body, which would be the competent authority, must be set up to regulate cross-listings and trade in securities on the regional stock exchange.

60. Nationals of one COMESA Member State could be encouraged to buy and hold stocks and shares in other COMESA countries. This would contribute to effective resource mobilisation and investment within the sub-region while at the same time economising on the use of foreign exchange. In addition, the establishment of a regional stock exchange would prevent the massive outflow of capital from the sub-region and reduce external borrowing. COMESA does acknowledge that in the foreseeable future the sub-region will continue to require large foreign capital for the growth and development of the private sector.[106] To improve the levels of capital in the region, COMESA admits that mechanisms must be created through the establishment of a COMESA Investment Fund, COMESA Unit Trusts and other financial schemes to enable direct private equity investments to take place in the sub-region.[107]

    The Importance Of Having A Competitive Regional Financial Sector To Support The Development Of A Regional Stock Exchange

61. We submit that COMESA must go beyond enhancing liquidity levels on national stock exchanges in the region (including the COMESA stock exchange) and introduce a well designed regulatory framework for public distribution of securities on the regional stock market to address the importance of having a competitive regional financial sector. The creation of a competitive and efficient regional stock exchange will require COMESA to pay attention to various matters which include the following:
    • to create appropriate financial institutions in the COMESA Member states;
    • to develop better systems of prudent regulation and supervision;
    • to improve the flow of financial information; and to develop appropriate skills for managing complex financial operations.
    • In addition, this will require the improvement of legal and accounting systems to support modern financial processes;
    • increasing the supply of long-term loans and other types of financing;
    • supervision of financial markets and institutions regarding the quality of their loans and the adequacy of their capital rather than compliance with directives on credit allocation, as has been the tendency in the past;
    • the development of financial institutions whose services will compete with and complement those of commercial and development banks, insurance companies, and pension funds which are potentially important sources of long-term finance in this regard; and
    • the creation of money and capital markets for effective mobilisation of domestic savings.[108]

62. Our proposals here, though meant mainly to address the issue of setting up a regional stock exchange and that of promoting cross-listings, follow from the field work undertaken by this author in Zambia.

    Conclusion

63. This paper has examined some of the important constraints affecting the development of emerging markets in Africa and the world over. A number of constraints on the regulatory framework(s) for public distribution of securities were identified. It was argued that although there are a number of risks associated with investing in emerging markets, the advantages of investing in these markets outweigh the disadvantages. Indeed, the advantages provide for great investment opportunities in a part of the world economy that is growing at a fast pace.

64. Also, it was pointed out that imperfect market conditions can affect the capital structure decisions of many corporate investors in emerging markets. Today, imperfect market conditions remain in many capital markets. These conditions, or market constraints, can affect the contribution of the legal framework for public distribution of securities to the development of a competitive stock exchange in a country such as Zambia. To overcome such problems, proposals were spelt out on the need for capital markets in Eastern and Southern Africa to integrate by moving towards the establishment of a regional stock exchange and the promotion of multiple listing and cross-border trade in securities.

Notes

[1] M.T. Porter, "Closed-end Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, (eds), The World's Emerging Stock Markets, (Chicago: Probus Publishers, 1993), p. 459.

[2] See C.B. Barry and L.T. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, Vol. 4, No. 5, (Oxford: Blackwell Publishers, 1995), p. 15.

[3] See id, 16.

[4] See generally K.K. Mwenda, Securities Legislation In Zambia: Areas Needing Strengthening, A Report Presented To The Securities And Exchange Commission Of The Republic of Zambia, Lusaka, June 1998 (unpublished).

[5] See generally, IFC, Emerging Markets Factbook, (Washington: IFC, 1994). See also C.B. Barry and L.T. Lockwood "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, supra., (n. 2) p. 16.

[6] See C.B. Barry and L.T. Lockwood, supra., (n. 2) p. 16.

[7] Ibid.

[8] See Ibid. For authoritative sources from the IFC, see The World Bank Group, Resource Guide For Businesses, (The World Bank: Washington DC, 1998), p.22; and, see generally IFC, Emerging Stock Markets Review: Performance, Valuations, and Constituents Of IFC Daily Index Markets, (Washington DC: IFC, August 1998).

[9] See the section on Emerging-Market Indicators in the weekly issues of the Economist. The list shown above was extracted from issues of the Economist from 20th April 1996 to 30th January 1998. Recently, however, the Economist has added Egypt to this list. See for example the Economist issue of 27th November 1999-3rd December 1999.

[10] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, p. 16. See above n. 2 p. 16.

[11] See ibid.

[12] See ibid. See also generally, IFC, Emerging Markets Factbook, see above n. 5.

[13] Whereas the term 'lion markets' refers to stock markets of Africa, the term 'tiger markets' refers to stock markets of the Far East. 'Puma markets', on the other hand, are stock markets located in Latin and South America. The use of 'animal' metaphors here, as is characteristic in a number of works on emerging markets, illustrates the importance of each of the animals mentioned above to the wildlife of the regions to which these animals belong. The lion is associated by many writers with the jungle in Africa and the puma with the forest of Latin and South America whilst the tiger is seen as an animal that is mainly found in Asia and other parts of the Far East.

[14] Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.

[15] For a similar view see Ibid., p.35.

[16] see ibid.

[17] See ibid.

[18] The information presented here is valid as at Thursday 11th July 1996. See ibid.

[19] See generally K.L. Gupta, Finance and Economic Growth in Developing Nations, (London: Groom Helm, 1984).

[20] See generally C.B. Barry, "Financial Institutions and Markets and the Economic Development of Four Asian Countries," in Recent Developments in Capital Markets in Turkey: Proceedings of the OECD - CMB Conference, (Istanbul: Capital Market Board, 1986).

[21] See Evening Standard Newspaper (UK), See above n. 14, p.35.

[22] See Nedcor Securities, The Stock Markets of Africa, (London: Nedcor Securities, 1996), p.4; Financial Times, FT500, Thursday January 1996; Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.

[23] In 1968 and 1969, there were major economic reforms in Zambia. During these reforms, the Zambian government took-over control from private investors in mining companies and in many non-mining companies.

[24] Letter from the Lusaka Stock Exchange Chief Executive, Mr. C. Mate, to the author sent via electronic mail and dated 26 September 1996. See also Lusaka Stock Exchange, Understanding the Stock Market, (Lusaka: Lusaka Stock Exchange, 1996), p. 1. Although ZCCM Ltd was not privatised at the time when information in the above table was prepared, as a public company, it had some of its shares traded on various stock exchanges in the world; see below. This explains, for example, why ZCCM Ltd appears among the top 20 players on Africa's lion markets.

[25] See explanation in above, n. 24. See also C. Mate, Chief Executive of Lusaka Stock Exchange, "How To Promote Development of Zambian Stock Market," in Financial Mail of Zambia 9th April 1996 p.1, an article responding to this author's article that appeared in Financial Mail of Zambia, 2nd April 1996.

[26] See letter from the Lusaka Stock Exchange Chief Executive, Mr. C. Mate, to this author sent via electronic mail and dated

[26] September 1996.

[27] Price-earnings multiples, like price earnings ratio, is a part of the everyday vocabulary of investors in the stock market. Unfortunately, some financial analysts are confused about what price-earnings ratio and multiples really signify. High price earnings ratio and low multiples often show that investors think that the company has good growth opportunities, that its earnings are relatively safe and deserve a low capitalisation rate, or both. However, companies can have high price-earnings ratios (and low multiples) not because price is high but because earnings are low. A company which earns nothing ('earnings per share' are often called EPS; thus EPS=0, here) in a particular period will have an infinite price earnings ratio as long as its shares retain any value at all. For a detailed reading, see R.A. Brealey and S.C. Myers, Principles of Corporate Finance, (New York: Mcgraw-Hill, 1991), pp. 60-62.

[28] See Evening Standard Newspaper (UK), Thursday 11 July 1996, p. 35.

[29] See Ibid.

[30] See C.B Barry and L.J Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments. See above n. 2, p. 17.

[31] See J.C. Van Horne, Fundamentals Of Financial Management, (London: Prentice-Hall, 1983), p. 436.

[32] This was confirmed by participants at a seminar on "Regulatory Constraints In Emerging Markets: Bank Restructuring and Governance," hosted by the International Law Institute in co-operation with Georgetown University, Washington DC on 26th October, 1999. This author was the convenor and instructor at the seminar. The seminar participants were drawn from Nigeria, Uganda, India and Barbados. These participants were all senior officials of either their home country Central Bank or a leading banking and securities firm in their home country.

[33] See figures 2.1(a), 2.1(b), 2.2 and 2.3, above.

[34] See A. Demirguc-Kunt and V. Maksimovic, Capital Structures in Developing Countries: Evidence from Ten Countries, Policy Research Working Paper 1320, (Washington: The World Bank Policy Research Department, July 1994), p. 3.

[35] Leverage, sometimes referred to as 'gearing', refers to the level of debt in the capital structure of a company. For an elaborate discussion, see E.F. Brigham, Fundamentals of Financial Management, (Chicago: The Dryden Press, 1986), pp. 495-500; R.M. Bowen, L.A. Daley, and C.C. Hubber, Jr., "Evidence on the existence and determinants of inter-industry differences in leverage," Financial Management, (Winter 1982), 10-20; J.M. Gahlon and J.A. Gentry, "On the relationship between systematic risk and the degrees of operating and financial leverage," Financial Management, (Summer 1982), 15-23; G. Donaldson, "New Framework for Corporate Debt Capacity," Harvard Business Review, (March-April 1962), 117-131; and G. Donaldson, "Strategy for Financial Emergencies", Harvard Business Review, (1969), 67-79.

[36] A company's cost of capital is the average rate of return required by investors in the company's securities. See L. Schall and C.W. Haley, Introduction To Financial Management, (New York: McGraw-Hill Book Co. 1980), pp. 191-192.

[37] See generally S.H. Archer and C.A. D'Ambrosio, The Theory of Business Finance: A Book of Readings, (New York: Macmillan, 1967); E. Solomon, "The Arithmetic of Capital Budgeting Decisions," Journal of Business, 29(2), (1956), 124-129; A.A. Robichek and S.C. Myers, Optimal Financing Decisions, (Englewood Cliffs: Prentice-Hall, 1965); M. Bromwich, The Economics of Capital Budgeting, (London: Penguin Education, 1976).

[38] See above.

[39] J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, (London: Chapman and Hall, 1990), p. 445.

[40] Ibid

[41] See M.H. Miller, "Debt and Taxes," Journal of Finance, 32, (1977), 261-276; S.C. Myers, "The capital structure puzzle," Journal of Finance, 39, (1984), 575-592.

[42] See the readings and exact pages cited above in n. 41.

[43] See J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, p 445., see above, n. 39.

[44] Ibid. 44 See J.M. Samuels, F.M. Wilkes and R.E. Brayshaw, Management of Company Finance, above n. 39, p. 144. We will not delve into intricacies of the Modigiliani and Miller hypotheses on capital structuring since that is not the concern of this study. For detailed readings on the Modigiliani and Miller Hypotheses, see F. Modigliani and M.H. Miller, "The cost of capital, corporation finance and the theory of investment", American Economic Review, 48, (1958), 261-296; and F. Modigliani and M.H. Miller, "Taxes and the cost of capital: a correction", American Economic Review, 53, (1963), 433-443. See also S.C Myers, "The Capital Structure Puzzle," in K. Ward, Strategic Issues in Finance, (Oxford: Butterworths-Heinemann, 1994), pp. 261-282, which covers much ground on the static trade-off theory and the pecking order theory; F. Black, M. Jensen and M. Scholes, "The capital asset pricing model: some empirical tests", in M.G. Jensen (ed.), Studies in the Theory of Capital Markets, (New York: Praeger, 1972); E.F. Fama and J. Macbeth, "Risk return and equilibrium: empirical tests," Journal of Political Economy, 71, (May-June 1973), 607-636; and R. Roll, "A Critique of the asset pricing theory's test; Part I: On past and potential testability of the theory," Journal of Financial Economics, 4(2), (March 1977), 129-176.

[45] C.B Barry and L.J Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, Vol. 4, No. 5, (Oxford: Blackwell Publishers, 1995), above n. 2, p. 17. See also generally P.J. Montiel, P.R. Agmnor and N.U. Haque, Informal Financial Markets in Developing Countries, (Oxford: Blackwell Publishers, 1995). In Zambia, for example, the collapse of Meridian Bank Ltd., a local bank that had rapidly grown into a multinational corporation with offices in the United Kingdom and the United States, saw the repeal of the existing banking legislation in Zambia and the replacement of that law with a new banking code, the Banking and Financial Services Act 1994. This move was meant to strengthen the banking regulatory system in Zambia, which among other things, now includes stronger emphasis on investor protection. Furthermore, the Bank of Zambia Act 1985 does require banks to place a statutory stipulated minimum as reserves by way of demand deposits in current account in the Bank of Zambia.

[46] C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 17.

[47] See explanation at above, n. 32.

[48] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 17.

[49] See ibid.

[50] As revealed by the field work conducted by this author in Zambia.

[51] See K.K. Mwenda, Corporate Finance Law In Emerging Markets: Zambia's Stock Exchange And Privatisation Programme, Chapter Seven, (forthcoming).

[52] See C.B Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, see above, n. 2, p. 17.

[53] See id., pp. 17-18.

[54] See explanation at above, n. 32.

[55] See generally ibid.

[56] See generally ibid.

[57] R.J. Briston, The Stock Exchange and Investment Analysis, (London: George Allen and Unwin Ltd., 1973), pp. 34-35.

[58] N.F. Stapley, The Stock Market: A Guide For The Private Investors, (Cambridge: Woodhead-Faulkner, 1986), p. 16.

[59] ibid.

[60] See for example A. Galal, L. Jones, P. Tandon and I .Vogelsang, "Synthesis of Cases and Policy Summary," in Proceedings of the World Bank Conference on the Welfare Consequences of Selling Public Enterprises, (Washington: World Bank, 1992); and generally, IFC, Privatization Principles and Practices: Lessons Of Experience Series, (Washington D.C: IFC, 1995).

[61] See generally IFC, Privatization Principles and Practices: Lessons Of Experience Series, above, n. 60.

[62] C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 23.

[63] See M. Boycko, A. Shleifer and R.W. Vishny, "Voucher Privatisation," Journal of Financial Economics, 35, (1994), 249-266.

[64] See ibid.

[65] United Nations, Development Business, Vol. 21, No. 494, (16th September 1998), p. 17.

[66] See R. Penza, Daily Parliamentary Debates, 18th June 1992, p. 104.

[67] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above n. 1, p. 460.

[68] See International Finance Corporation, quoted in M.T. Porter, "Closed-End Emerging Country Funds Review," in K.H. Park and W. Van Agtmael, The World's Emerging Stock Market, (Chicago: Probus Pub. 1993), p. 461.

[69] See id., p. 460.

[70] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, (Chicago: Probus Publishers, 1993), above, n. 1, p. 460.

[71] See IFC, Investment Funds In Emerging Markets: Lessons of Experience Series, (Washington D.C: IFC, 1996), pp. 12-15.

[72] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.

[73] See ibid.

[74] See ibid.

[75] See IFC, Investment Funds In Emerging Markets: Lessons of Experience Series, above, n. 71, pp. 12-15.

[76] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.

[77] Ibid.

[78] Ibid.

[79] Ibid.

[80] Ibid.

[81] Ibid.

[82] See generally Nedcor Securities, The Stock Markets of Africa, above, n. 22.

[83] See generally ibid.

[84] M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.

[85] See IFC, Foreign Direct Investment: Lessons of Experience, (Washington D.C: IFC, 1997), pp. 80-88.

[86] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 461.

[87] See C.B Barry and L.J. Lockwood, C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 21. For an elaborate read on the semi-strong form tests of emerging markets see for example, M. Herrera and L.J. Lockwood, "The Size Effect in the Mexican Stock Market," Journal of Banking and Finance, 18, (1994), 621-632. On the meaning of the term 'market efficiency', see R.A. Brealey and S.C. Myers, Principles of Corporate Finance, above, n. 27, p. 290. R.A. Brealey and S.C. Myers observe: "When economists say that the security market is efficient, they are not talking about whether the filing is up-to-date or whether desktops are tidy. They mean that information is widely and cheaply available to investors and that all relevant and ascertainable information is already reflected in security prices." The concept of efficient markets is a by-product of a chance discovery on how stock and commodity prices behave. In other words, prices of securities on an efficient market follow a random walk.

[88] See M.T. Porter, "Closed-end Emerging Markets Country Funds Review," in K.H. Park and W.Van Agtmael, (eds), The World's Emerging Stock Markets, above, n. 1, p. 21.

[89] See for example R. Aggarwal and P. Rivoli, "Seasonal and Day-of-the-Week Effects in Four Emerging Stock Markets," Financial Review Studies 1, (1988), 541-550; M. Gultekin and N.B. Gultekin, "Stock Market Seasonality: International Evidence," Journal of Financial Economics, 12, (1983) 469-481; S. Claessens, S. Dasgupta and J. Glen, "Return Behaviour in Emerging Markets," World Bank Economic Review, 9, (1995), 131-151; A. Corhay, G. Hawawini and P. Michel, "Seasonality in the Risk-Return Relationship: Some International Evidence," Journal of Finance, 42, (1987), 49-68.

[90] See L.S. Speidell and R. Sappenfield, "Global Diversification in a Shrinking World," Journal of Portfolio Management, (1992), 57-67; F. Longin and B. Solnik, "Is the Correlation in International Equity Returns Constant 1960-1990?" Journal of International Money and Finance, 14, (1995), 3-26.

[91] See C.B. Barry and L.J. Lockwood, "New Directions in Research on Emerging Capital Markets," Financial Markets, Institutions and Instruments, above, n. 2, p. 20. See also W. Bailey and J. Jagtiani, "Foreign Ownership Restrictions and Stock Prices in the Thai Capital Markets," Journal of Financial Economics, 36, (1994), 57-87. For a discussion of foreign investor participation on the Korean Stock Exchange prior to 1991, see C.S. Cheung and J. Lee, "Integration vs. Segmentation in the Korean Stock Market," Journal of Business, Finance and Accounting, 20, (1993), 267-273.

[92] See above.

[93] According to R.A. Schwartz, Reshaping the Equity Markets: A Guide for the 1990's, quoted in H.K. Baker, "Trading Location and Liquidity: An Analysis of U.S Dealer and Agency Markets for Common Stocks," Financial Markets, Institutions and Instruments, Vol. 5, No.4, (Oxford: Blackwells Publishers, March 1996), p. 6: A liquid market typically has three attributes - depth, breadth, and resiliency. A market has depth if there are orders both above and below the price at which a security now trades. Depth is lacking when price rounding is substantial and the bid-ask spread is large. On the other hand, a market is broad if the buy and sell orders are both numerous and large. Thus, price changes, in a liquid market, should be invariant to the size of the transaction. Breadth is lacking when the effective spread for large orders is large. By comparison, a market is resilient if new orders pour in promptly in response to price changes that result from temporary order imbalances. Resiliency is lacking when the order flow does not adjust quickly to errors in price discovery.

[94] See Interview with Mr. Mumba Kapumpa, Chief Executive, Securities and Exchange Commission, Lusaka, 18th December 1996: "...the francs CFA countries in West Africa, the French speaking countries, they are setting up a regional stock exchange which will be based in Abidjan most likely, of all the French speaking West African countries. Now they are perhaps in a different position than we are in this region (Southern and Eastern Africa) in the sense that all of them belong to the francs CFA monetary system which is the currency that they all use so that... and they were connected to France such that although they are different independent countries they have always operated from a monetary point of view as one country. Therefore, it would be very easy for them to consider that particular regional stock market."

[95] As revealed by a study conducted in Zambia by this author; Interview with Mr. D.B. Luswili, Management Accountant and Acting Finance Director, Stanbic Bank (Z) Ltd, Lusaka, 12th December 1996.

[96] Similar views were expressed in Interview with Mr. Mebeelo Mutukwa, Stockbroker and Managing Director, Pangea Securities Ltd., Lusaka, 11th December 1996, where Mr. Mutukwa observed that: "there are some companies which are very specific to a country which may not be very attractive on the regional stock exchange and those that continue to sit on the local one, but there should be provision to create SADC (Southern African Development Community) companies and let them graduate after meeting very strict selection criteria onto the regional stock exchange."

[97] On the need to promote cross-listings so as to integrate the markets in the region - Interview with Mr. Charles Mate, Chief Executive, Lusaka Stock Exchange, Lusaka, 20th December 1996; Interview with Mr. Douglas Rolls (Securities Services Manager) and Mr. George Roberts (Manager Merchant Banking), Barclays Bank (Z) Ltd., Lusaka, 12th December 1996; Interview with Mr. D.B. Luswili, op. cit.; Interview with Mr. Peter Yuyi, Manager Securities Brokerage, Emerging Markets Securities, Lusaka, 18th December 1996; and Interview with Mr. Mebeelo Mutukwa, op. cit., - supported this view.

[98] See P. Davis, Gower's Principles of Modern Company Law, (London: Sweet and Maxwell, 1997), p. 395.

[99] For a detailed discussion on the regional integration schemes in Eastern and Southern Africa, see generally K.K. Mwenda, "Legal Aspects of Regional Integration: COMESA and SADC on the Regulation of Foreign Investment in Southern and Eastern Africa," African Journal of Comparative and International Law, (The African Society of International and Comparative Law, UK, June 1997, Vol.9, Pt.2).

[100] See Heads of State and Government of the PTA, PTA Trade And Development Strategy, (Lusaka: PTA Publication, 30-31 January, 1992), p. 30.

[101] See below for a fuller discussion.

[102] See for example The European Convention On Jurisdiction And The Enforcement Of Judgements 1968. For detailed readings on enforcement of foreign judgements see A. Lowenfeld, International Litigation And Arbitration, (St. Paul, Minnesota: West Publishing Co., 1992), pp. 368-450; Henry v. Geoprosco International Ltd. [1976] Q.B. 726 (C.A.); Somportex Limited v. Philadelphia Chewing Gum Corporation [1968] 3 All E.R. 26; Somportex Limited v. Philadelphia Chewing Gum Corporation 92 S.Ct 1294, 31 L.Ed.2d 479 (1972); Elefanten Schuh GmbH v. Jacqmain [1981] E.C.R. 1671, [1982] 3 C.M.L.R 1; Etablissement Rohr S.A. v. Ossberger [1981] E.C.R. 2431, [1982] 3 C.M.L.R. 29; Hilton v. Guyot 159 U.S. 113, 16th S.Ct. 139, 40 L.Ed. 95 (1895); Johnston v. Compagnie Generale Transatlantique 242 N.Y. 381, 152 N.E. 121 (1926).

[103] In Factor v. Laubenheimer, 290 U.S 276, 287, 54 S.Ct. 191, 78 L.Ed 315 (1933), it was held that "[t]he principles of international law recognise no right to extradition apart from treaty. While a government may, if agreeable to its own constitution and laws, voluntarily exercise the power to surrender a fugitive from justice to the country from which he has fled ... the legal right to demand his extradition and the correlative duty to surrender him to the demanding country exist only when created by treaty."

[104] See M. Dixon, Textbook On International Law, (London Blackstones, 1990), p. 70.

[105] The COMESA Court of Justice was established pursuant to the COMESA Treaty. For a fuller discussion on this see K.K. Mwenda, Legal Aspects of Corporate Capital and Finance, (Washington DC: Penn Press, 1999), Chapter Five.

[106] Heads of State and Government of the PTA, PTA Trade And Development Strategy, op. cit., p. 30.

[107] See ibid.

[108] See id, p. 29.