K.K. Mwenda, Collective Investment Schemes and the Accommodation of Small Investors on the Stock Market, African Journal of Comparative and International Law, (Vol. 11, Pt.3, 1999).

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K.K. Mwenda, "Collective Investment Schemes and the Accommodation of Small Investors on the Stock Market," African Journal of Comparative and International Law, (Vol. 11, Pt.3, 1999).
      Citation: 11 Afr. J. Int'l & Comp. L. 492 1999 Content downloaded/printed from HeinOnline (http://heinonline.org)Tue Sep 2 14:02:15 2014-- Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at http://heinonline.org/HOL/License-- The search text of this PDF is generated from uncorrected OCR text.-- To obtain permission to use this article beyond the scope of your HeinOnline license, please use: https://www.copyright.com/ccc/basicSearch.do? &operation=go&searchType=0 &lastSearch=simple&all=on&titleOrStdNo= 0954-8890  COLLECTIVE INVESTMENT SCHEMES ND THE  CCOMMOD TION OF SM LL INVESTORS ON THE STOCK M RKET KENNETH KAOMA MWENDA I. INTRODUCTION This paper examines the legal aspects of using collective investment schemes to accommodate small and risk averse investors on emerging stock markets in Africa. The paper provides important comparatives on the subject. Theoreticalarguments and empirical evidence are introduced to set the legal analysis in its proper socio-economic context. Salient features of the law in Zambia and other common law jurisdictions are examined. It is argued that since many emergingmarkets in Africa face constraints relating to inadequate liquidity, the introduc- tion of collective investment schemes on the markets could help to galvanise financial resources for the markets. Small and risk averse investors could enterand exit the markets easily through the medium of collective investment schemes. The adoption of such measures could stimulate an increase in the breadth' of emerging markets and could deepen their capital bases. The first part of this paper provides an overview of some of the major con- straints affecting the introduction of collective investment schemes in emergingmarkets. The second part looks at the regulatory framework governing collective investment schemes in a country such as Zambia. Empirical evidence is set out and some of the constraints affecting the efficacy of the Zambian regulatory framework are highlighted. * LLB, BCL, MBA, Ph.D., DBA, FCI, FRSA, Rhodes Scholar and formerly Lecturer in CorporateFinance Law, the University of Warwick (UK); presently with the World Bank, Washington D.C., USA. Comments from colleagues who read through the earlier drafts of this paper are gratefully acknowledged. The interpretations and conclusions expressed in the paper are entirelythose of the author. They do not necessarily represent the views of the World Bank, its executivedirectors, or the countries they represent.   M.N. Massimb and B.D. Phelps, Electronic Trading Market Structures and Liquidity FinancialAnalysts Journal, Vol.50, No.1 (1994), 39-48 at p. 41, observe, firstly, that liquidity refers to a market s ability to provide immediate execution for an incoming market order (often called 'immediacy') and the ability to execute small market orders without large changes in the market price (often called 'market depth' or 'resiliency'). H.K. Baker, Trading Location and Liquidity: An Analysis of U.S. Dealer and Agency Markets or Common Stocks Financial Markets Institu-tions and Instruments (see above for full citation), p. 2 , adds: these simple definitions of market liquidity reflect two dimensions of a desired transaction namely, speed (transaction time) and price (transaction cost). The speed dimension involves the timeliness of liquidity. Based on this dimension, the liquidity of a stock issue means that transactions of its shares are immediatelyavailable. Yet, demanders of immediacy can usually get rapid trade execution if they are willingto incur inferior trading terms. Therefore, the second dimension of a liquidity market is achievingimmediacy at minimal cost. It must be observed, however, that liquidity, like market depth,ultimately affects the success or failure of a stock market. 11 RADIC 1999  Collective Investment Schemes and the Accommodation of Small Investors 493 Figure 1 Lion Markets of Africa: Their Capitalisations and Quoted Companies. Country Quoted Companies Market Value Botswana 12 £260m Egypt 718 £4.3bnGhana 18 £1.3bn Ivory Coast 31 £562mKenya 56 £1.2bnMalawi* Mauritius 39 £1.2bn Morocco 44 £4bn Namibia** 21 £8.4bnNigeria 182 £1bn South Africa 646 £165bn Sudan 34 £30m Swaziland 4 £220m Tunisia 21 £2.6bn Zambia 8 £300mZimbabwe 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, th July 1996 p. 35. II GENER L OVERVIEW OF EMERGING M RKETS IN FRIC In most of the literature on emerging markets, the lion markets o Africa 2 arerarely listed alongside the tiger markets o the Far East or the puma markets of Latin and South America. There does not seem to be any plausible explanation to justify the exclusion o some o Africa s stock markets from the category ofemerging markets in the world. As one commentator observes: But the lion markets o 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 puttogether, there are already 16 emerging markets in Africa and more on the way. 4 2 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 o the animals mentioned above to the wildlife of the regions to which these animals belong. The lion is associated by many writerswith the jungle in Africa and the puma with the forest o Latin and South America whilst the tiger is seen as an animal that is mainly found in Asia and other parts o the Far East. 3 For a similar view, see Evening Standard ewspaper UK), Thursday July 1996, p. 35 . 4 See ibid., p.35.  494 Kenneth Kaoma Mwenda Figure 2 Twenty Top Players On The Lion Markets Company ountry Business Market Value Ashanti Goldfields Ghana Mining £1 lbn Delta Corporation Zimbabwe Drinks £280mBarclays Kenya Kenya Banking £190m Zambia Sugar Zambia Sugar £ 130m ZCCM Zambia Mining £125m Bindura Nickel Zimbabwe Mining £115m Brooke Bond Kenya Kenya Food £1101i Standard Chartered Kenya Banking £loom BAT Kenya Kenya Cigarettes £90m Kenya Commercial Bank Kenya Banking £85m Barclays Zimbabwe Zimbabwe Banking £85m Zimbabwe Sun Zimbabwe, Restaurants, Hotels £82mHippo 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-Cl Ivory Coast Machinery £60mTotal Kenya Kenya Oil £60mFirestone EA) Kenya Tyres, rubber goods £58m Source Nedcor Securities, he Stock Markets of Africa London: Nedcor Securities, 1996), quoted in Evening Standard Newspaper UK), Thursday, th July 1996 p 5 Indeed, by July 1996 Senegal, Uganda and Tanzania had already signalled that they were planning to launch stock markets by the end of 1996.1 Above at page 246 is figure 1 illustrating the growth in the number of stock markets in Africa and the growth in the business on these markets. The year, 1996, in which the figures were compiled, is chosen randomly to show how one can, at a quick glance, have a view of the growth of emerging markets in Africa. Above figure 2 shows the top twenty players on the lion markets of Africa. 6 III THREATS OF MONOPOLISTIC TENDENCIES ON THE LIONMARKETS OF AFRICA AS A CONSTRAINT ON THE DEVELOPMENT OF EMERGING MARKETS 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 5 See ibid. p.35. 6 See ibid. p.3 5 .  Collective Investment Schemes and the Accommodation of Small Investors 495 Anglo-American Corporation Ltd and De Beers Ltd. 7 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. 8 This evidence suggests that the lion markets of Africa and the African business community must now consider the viability of introducing collective investment schemes on the lion markets. Given a favourable economic climate, collective investment schemes could galvanisefinancial resources from small and risk averse investors so that these resourcesconstitute economies of scale to compete with giant conglomerates such as theSouth African Anglo-American Corporation Ltd and De Beers Ltd. As pointed out already, the adoption of such measures could stimulate an increase in thebreadth of the lion markets and deepen their respective capital bases. A Restrictions on Investment of Pension Assets as a onstraint In many developing countries, the investment of pension assets is highlyrestricted. 9 For example, investment may be limited to local government securi- ties pension assets are limited to domestic investment because a goal of the plan is to aid in the mobilisation of capital sources tosupport the nation s growth. When such restrictions are imposed, they increase the risks faced by workers because the domestic econo- mies in many developing nations are very narrow and are exposed tohigh 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. 0 As an alternative to investing in pension funds, individuals could consider investing in other collective investment schemes such as unit trusts. This viewcomplements the theme in the paper that since many emerging markets in Africa face constraints relating to inadequate liquidity, the introduction of collectiveinvestment schemes on the markets could help to galvanise financial resources on the markets. 7 Ibid., p.35. 8 See Nedcor Securities The Stock Markets of Africa (London: Nedcor Securities, 1996), p. 4 ; Financial Times, Ff500 Thursday January 1996; Evening Standard Newspaper UK), Thursday   July 1996, p. 35 9 See 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), p. 17 . 10 See ibid., pp.17-18.
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