With new African businesses hungry for growth capital, domestic stock exchanges must develop the structures and expertise to woo the local market and keep investment in the continent.
Every country should have its own recipe for stock exchange growth. Go back to the fundamentals. Do we have the right market infrastructure? Do we have enough investors? Which side is really missing, retail investors or institutional investors? If it is individual investors, then a huge investor campaign is needed; if it is institutional investors, then perhaps it has something to do with regulation.
There are lots of myths and misunderstandings and a lack of information about what companies can actually get from the capital markets. You do not lose control by giving up 10%, 15% or 25% – you make your company sustainable for further generations. Around 80% of companies disappear within the lifespan of the first generation of the founders. That is a very high number and that should be scary.
In Turkey, we started an initial public offering (IPO) campaign back in 2008 when the markets were down. We involved everybody in it: the stock exchange, the association of broker-dealers, the association of chambers of commerce and industry, and the regulator. We trained one or two people in the chambers to be knowledgeable about the capital markets, acting as our agents to refer the companies to us.
We had 23 IPOs in 2010 and 29 in 2011. We introduced a new market, which is called the Emerging Companies Market, similar to London's Alternative Investment Market. There are different rules. We reduced our listing fees to one-tenth for these emerging companies.
Around 80% of companies disappear within the lifespan of the first generation of the founders
What we said is that if a company needs finance for growth or for investment, then the way that it should go public is to increase capital and sell new shares rather than a shareholder sale, so that whatever money they raise should be used in the company.
To grow, African exchanges should not just concentrate on technology. Technology is a facilitator. Even if everything is in place, if trading costs are too high, people do not trade too much. Lower trading fees and 'tick sizes' (the smallest increment that a stock can move) so that people can buy and sell easily. Also consider market making: market makers provide good liquidity. If that is not possible, try introducing single-price auctions for very illiquid companies and bring in some good supervision so that there is no market abuse.
Why not consider reverse listings? Some companies have difficulty finding funding in African markets and they go abroad, while the local exchanges are really looking for sizeable companies. If a larger exchange has a certain disclosure requirement, it cannot be anything less restrictive or less sophisticated than the one that is used locally. Accept their disclosure requirements and do not charge any listing fees for the first couple of years. By the time you build up some liquidity, maybe the company will no longer want to be abroad because it is more costly.
This would be better than a cross-listing. Cross-listings have to make sense, otherwise I do not think they are functional. If there are time differences, such as between the US and Turkey – which have only one hour of common trading – that means there is quite a bit of liquidity and there can be some arbitrage as well.
US pension funds are allowed to invest in equities that are listed in the US, not abroad. So if you go and list in the US, then you have a new investor base that normally would not have access to your stocks.
It makes sense. For example, Turkcell, the largest mobile phone operator in Turkey, made a public offering in Turkey and in the United States at the same time. Of that offering, 65% was made in the US and the rest was in Turkey. Now probably more than 80-85% of the trading volume is in Istanbul. Similar conditions applied to large exchanges in Europe and Asia as well.
But if the markets have no time difference, then the liquidity goes to the large exchange. If you have the right infrastructure and the right market mechanisms, it is bet- ter to have local liquidity and a central order book in your home country because that helps the exchange, regulator and intermediaries to build up experience. If you lose all of that to the other exchanges, you lose expertise and effectiveness in enforcements with respect to protection of investor rights.
Exchanges have to come up with some formula that will keep all of these elements and make everybody happy. I suggest the best way to continue cooperation with other exchanges is through order routing. We can route orders to each other, connect our clearing institutions and central depositories so there is a seamless operation going on, and share the fees on transferred orders that we route to each other.
It is a win-win situation. It is being tried in Asia now by the Association of Southeast Asian Nations network. Malaysia, Philippines and Thailand are connecting like this. I think African stock exchanges can also route orders to each other, but what is important is the clearing and settlement infrastructure. They have to have a seamless operation, they have to have a very efficient system and it should be cost effective as well●
Hüseyin Erkan is a former chief executive officer and chairman of the Istanbul Stock Exchange, (2007-2011)