Intemational Business Management 4 (4): 222-228, 2010 ISSN: 1993-5: © Medwell Joumale, 2010 The Role of the Dar es Salaam Stock Exchange in Safeguarding Securities Investors in Tanzania AS. Norman Faculty of Business and Economies, Iringa University College, ‘Tumaini University, P.O. Box 200 Iringa, Tanzania Abstract: This study examines the roles/Tunctions of the Dar es Salaam Stock Exchange (DSE) in safeguarding the westors of securities in Tanzania, The business of securities, both bonds and shares has taken a new dimension since its establishment in Tanzania. Ithas attracted many people of different cadve, However, some investors have been doubtful on whether they should invest or not, The doubts seem to be cemented on risk assceiated with investing This stsly therefore, expounds the role of DSE through narrating measures that have been put in place for safeguarding the investors of securities, The study utilizes mixed methodologies of data collection with documentary and the use artifacts taking the leading role. The study concludes that there are ‘measures that have been put in place through rules and regulations with the view to protecting investors of stock exchange, However, it isthe investors’ responsibility to attain necessary information regarding the firms that ell bonds and or shares and studying, among others, the finaneial information of the firms 20 as to realize the performance and prospective opportunities ofthe firms, Key words: Securities, Dar es Salaam Stock Exchange (DSE), investors, firms, CMS, Tanzania INTRODUCTION This study discusses the roleimetions of the DSE in safeguarding the investors of securities (bonds and shares). The stocks exchange business has kept rowing since is establishment in 1996 when the fst firm, Tanzania Oxygen Limited (TOL) listed shares with the DSE. However, some people seem to be doubtful in deciding to invest for what is considered a risk business eis from that point of view this study set the funetions ofthe DSE andi role in safeguarding the investors. The fist part therefore is the introduction which provides the background to the DSB and the Capital Market Sccurty Authority (CMSA), The second part narrates the functions of the DSE, qualifications and procedures for listing securities. The advantages and disadvantages are provided in the 3rd part. Both advantages and disadvantages are essentially looked at from administrative point of view of the firms listing securities. The eonelusion is set on part four Background to DSE: The Dar es Salaam Stock Exchange (DSE) was established by the capital markets and security authority under the Capital Markets and Securities (CMS) Act of 1994, The DSE was incorporated in September, 1996 as a company limited by guarantee without a share capital under the companies ordinance (Cap. 212) (DSE, 2008a). The enactment of DSE came as a result of 222 govemment’s policy of transforming its economy from public government dominated economy to private sector driven economy. The Capital Markets and Securities Authority (CMSA) is 2 government agency established to promote and regulate seowrities business in Tanzania, It was established under Capital Markets and Securities Act 1994. The legal framework for the regulation of the seourites industry & the Capital Markets and Securities ‘Act, 1994 (Act Nox 5 of 1994 as amended by ActNo: 4 of 1997) ‘The act is supplemented by various regulations that are promulgated by the Minister for Finance, DSE is non-profit making organization created to facilitate the government implementations of the economic reforms in particular on enabling the private sector raise capital. The exchange became operational in April 1998 with TOL Gas Limited listing as the first company followed by the ‘Tanzania Breweries Limited (TBL) during the same year. ‘The delay was due to the necessary background ‘operational preparations that were inevitable such as training of brokers and formulation of issuance and trading rules (CMSA, 2008). Hence, a stock exchange is a seoonclary capital market where large anki small investors ccan buy anal sell securities (shares and bonds ete). It is an organized market where buyers and sellers of securities meet as they are represented by deslers/trokers and aacquite or dispose securities (DSE, 2007, Norman, 2006). It is @ market which securities are traced by members ofIni, Business Manage, 4 (4): 222-228, 2019 the exchange who may act as both agents (brokers) and as principal (dealers) (Beaning, 2007), The operation of the DSB is vested is vested in the hands of the council Which is the board of directors of the eompany. The fist Board of Directors was elected in July, 1997 Further, listing of shares and bonds at the Dar es Salaam Stock Exchange (DSE) provides companies, the govemment as well as municipal researchersities with a possible soures of accessing funds from both the public as well as institutional investors. Listing of these securities facilitates secondary market trading of the bonds and shares and thus provides the necessary liquidity required on the market Literally every market has 1 demand side and supply side Hence, both the central government and the local ‘government are consisered supply side of the stock exchange while the public i considered as the demaad side, Therefore, the two sides mest when shares aro Issued forthe first time (CMSA, 2008; DSE, 2003) The first issuance of shares is commonly known a Initial Public Offer (IPO), The general term of supply side does not exclude the various companies other than those owned parily or full by the government and other issuing, companies Inall sense, the importance of financial information or accounts information is inevitable to investors and most findings have indicated the imperativeness of these reports, Naser and Nuseibeh (2003) and Norman (2006) provide a number of studies which have investigated the usefulness of corporate information to the users and found the annual report to be important and primary souree of information. ‘These include (Abu Baker and Naser, 2000; Mautz, 1968; Lee and Tweedie, 1975a, b, 1976, 1981; Epstein, 1975; Anderson, 1981; Amold and Moizer, 1984; Day, 1986: Gaiewo2, 1990; Epstein and Pava, 1993, 1994, Bence ef al, 1995; Anderson and Epstein, 1995, Abu-Nessar and Rutherford, 1996; Bartlett and Chandler, 1997), Registered firms with the DSE: As of Masch 2009, 14 companies listed their shares with the DSE, Out of 14 companies, three are from Kenya and their shares not only cross listed at the DSE but also at the Uganda stock exchange and Nairobi stock exchange. However, the concem has been what isthe role ofthe DSE and to what extent do people understand the functions of the DSE and its importance in reducing the risks that may be encountered by the investors of securities, Most literature indicates that financial performance of the firms isa key factor or indicator on the reliability to purchase shares, though not the only. 223 MATERIALS AND METHODS. Functions of the DSE: CMSA and DSE have mandate to make rules and regulations for the purpose of fostering the exchange business, For example, the Dar es Salaam stock exchange has developed a two tier scheme of listing securities which are first tier and second tier, In Tanzania the most practiced Listing isthe First Tier. On the other hand, the CMSA has made about 14 rules conoemed with improving of the entire business (DSB, 2007, CMSA, 2008), _DSE (2008) provides functions of the company Which are Provides a market for listed securities: It enables those wishing to join or leave the listed companies to do so and those wishing to leave to do so as well. The DSB. therefore, provides liquidity by way of providing a continuous market for securities whereby securities are exchanged For eas, Facilitates price discovery: The pricing mechanism ensures that buyers and sellers can do so at a price determined by demand and supply forees. Neither the exchanges nor brokers determine the prices of the securities traded on stock exchanges. Facilitator of transpareney: Disclosure requirements put in place by the DSE require listed companies to promptly disclose all price sensitive information so that investors may make informed decisions. This is achieved at two levels; firs, atthe initial offering period when companies have to meet stringent listing requirements relating to offering documents and second through continuous: listing obligations. In this context, the DSE becomes information clearing point between listed companies and investors (information hub), Facilitates privatization and wider ownership of resources: The DSE has facilitated and continue to facilitate the privatization of the some parastatal organizations which were hitherto under the control ofthe government whose shares have been sold by the ‘government through the DSE. Facilitates raising of eapital for enterprises: The DSE. facilitates companies to sell new shares‘bonds at better prices which lower the cost of capital to such companies and improves their chances of increasing operating profits, Experience has shown that investors accept higher prices for shares and lower interest rates For bonds, when the companies selling these securities are well known and have met stringent listing conditions andIni, Business Manage, 4 (4): 222-228, 2019 reporting requirements as opposed to lesser known, enterprises where the investors are faced with a greater amount of uncertainty and as @ result they demand lower prices for shares of higher yields as a compensation for this increased risk Creation of wealth through investing in listed securities: It has been proved in many occasions that shares offer investors the real retum because shares out-perform inflation on average and have done so consistently since share markets came into existence, Shares listed at the DSE have performed very well above the ination rate When compared with bank deposits. Shares are not passive store of value like tanks’ deposits. Bank's deposits do not inerease in size during the lock-in period bout shares do increase in value overtime. Contributes to the cultural transformation of ‘Tanzanian: Acthe time the DSE was established, only a handful Tanzanians could claim to be knoviledgeable with stock market operations, Operationalization of the DSE. has contributed substantially towards public enlightenment which has caused a few Tanzanian to invest in listed companies ay a result of this transformation, The public enlightenment exercise is a continuous ene and will continue while taking into account past experiences. It is the DSE’s goal that Tanzanians appreciate and eventually adopts a thrift culture that thrive an equity ownership in successful business coneemns Listing requirements for shares: The DSE has set a number of requitements for listing, Procedures that govern the companies in order to be listed here: + The company has to release initial ant periodic information to the public so 2s to inform the investors regarding the company’s position and progress over the period of time. Listed companies are requised to publish interim reports covering six months and the annual report ‘The company has to have a track record of adequate duration to allow for the possible investors to appraise its present and possibly future performance The company is of the size which makes the participation of the publi in investing therein possible ‘The minimum requirement of the capital of the company is TZS 400 million as of the year 2008 December 224 + The company must be @ public company as required by the companies Act. 2002 that it has at least two shareholders and that the articles and memorandum fof association should indicate that the company’ in question is a publie company ‘The public must hold at least 25% of the issued shares, Shares held by the employees are not considered in determining the 25% threshold ‘The company must prepare and obtain approval of the Prospeetus from the Capital Markets and Security Authority (CMSA), The requirement governing the conditions and contents of the prospectus are provided by the capital markets and securities (prospectus requirements) regulations, 1997 ‘The company must undertake to comply with the set of undergoing listing obligation However, there are conditions that apply before listing and others apply after a listing is done. When the listings is already effected the conditions following thereto is known as continuous listing obligation Moreover, some conditions are critical and thus applied when listing of shares (equities) while others are crucial when listing of bonds (debt securities) Listing procedures for debt securities: The DSE (2008b) hand book father provides listing procedure for securities, The listing of debt securities can be termed as ‘secondary listing. The logie behind such conception is the fact that dett security listing is done after the company’ has sufficed most conditions for listing equities Hence, the following are the qualities for listing debt securities: + Temust have already obtained listing ofits ordinary shate capital It should offer at least Tshs, About SO million of issued loan capital of the class to be listed. Further issues of shures of a class already listed are not subject these limits Its total loan capital should not exceed 100% of, shareholders” funds less intangible assets It is required to enter into a contract with the exchange on such terms a8 the exchange may require forthe protection of stockholders ‘The procedures in listing shares imply that a bad company isnot likely fo sell their shares in the market. No broker and bank would like to be involved in selling the shares of the company whose financial analysis indicate that i a poorly performing or which its future profitability is questionable, So, the fact that banks and brokers agreeIni, Business Manage, 4 (4): 222-228, 2019 to be involved in the issuing of shares of a particular company implies that that company is relatively good Also, it should be made clear that loss may occur even if there is financial analysis largely because the price of a share reflect investor sentiment about dhe company and not always necessary that price refleet fundamental value. However, getting information on whether irwestors consider financial analysis before investing is important aspect and may justify the survey particularly the prudence of financial information (Narman, 2006). Rules set for listing shares is one thing and investor's deivers to investing are another and one of the fundamentals for making suet decision is fo know the financial information of the interested firm, ‘The roles of the stock exchange: The principal sole of the stcck exchange company is the mobilization of the resources and directing such resouroes to the productive sectors ofthe economy (CMSA, 2008, DSE, 2008, ¢). It offers a relatively convenient and an alternative access to capital in comparison to the traditional financial instruments such as bank loans, The resource directing, strategy has up to 2001 enabled about 40,000 Tanzanian to be owners of various companies through purchase of shares (DSE, 20080). (On the government side the DSE has made possible for the gain of 17.6 billion Tanzania shillings through sale of its shares of Tanzania Breweries Company Limited (TBL)and the Tanzania Cigarette Company Limited (TCC) (DSE, 2001), Obviously, the eurvent mumber of the people ‘owning shares is big RESULTS AND DISCUSSION Advantages and disadvantages of listing shares: There are many advantages for investing in shares, However, there is also what may be considered disadvantages for listing shares, Advantages: With the ever inereasing techniques in terms of investment and technological advancement, the choice toallocate finances asa strategy for investment is crucial thas been however noted in this literature that there are potentials in investing in securities such as bonds and shares compared to the cardinal practice of depositing finances with the finaneial institutions such as banks and wait for the accrued money through interests, ‘The vitality of investing in the stocks is a reality that no sane person can deny. Thus, this part provides advantages for listing secutities specifically atthe DSE, 225 ‘The company can raise capital relatively cheaply from the publie. While the nermal practice for financial increases ofthe firms are raising capital through loan acquisitions from banks and other financial institutions which culminates forthe interest of about 16-23% in favor of the banks and other financial institutions (On the contrary the stock exchange does the same role of raising the capital of the firm without subjecting the entire firm in interest charged against it Thus, the fim listing the securities with the DSE does so with minimum risk of loosing its capital ‘The performance of the company is monitored by the market and therefore @ listed company’ is likely to perform better to meet the expectations of the publi. ‘The qualifications for the companies’ listed as {indicated in this study limite to the maxizmum the possibilities of a company to perform contrary to the ‘wishes of the investors. Thus, it ean be addled that it i of paramount importance of the company to list her shares with the stock exchange, since it further helps the company to assess itself on whether it has a favorable future survival Listing of seeurtics is a marketing tool for a company as it would be refered to frequently during the release of the market information to the public. The DSE is eurvently conducting five trading per week, ‘Thus, a company listed would be enjoying marketing benefits whenever trading results of listed companies are announced in either electronic or print media Listed companies are generally considered to be ‘good performers and therefore are perceived to have the potentials of providing a good setum to the investors, Thus, listed companies experience other benefits Listing widens the range of financing choices of the company. Thus, a company is not bound to raise its capital through a certain means only, Rather has variety of options including listing shaves, financial institutions, dzectors and banks Listing of shares lowers financing cost of the enterprises. This could be associated with raising capital without incurring any substantial amount as 1 fee to the capital such as interest. Thus the burden for the company would be reduced Listing facilitates share ownership changes or privatization, The listing company paves a way for transfer of shares from one individual to another. ‘Thus it enables individuals to enjoy ownership of the company for time they wantIni, Business Manage, 4 (4): 222-228, 2019 + Listing attracts foreign portfolio investors, Just a8 local investors are attracted through listing, the same happens to foreign investors, It enables foreign investors realize where to invest. Among the components important for investing i market and capital availability. An assurance of the market and ability to raise capital facilitates foreign investors to bring their intended capital from out side and raise some capital within + Listing enables both firm and individuals to realize the value of the company through the interplay of the demand and supply of the company shaves atthe SE, ‘Normally, assessing oneself ean be a difficult thing and some time chellenging. Since, self assessment means giving value of your self using the eriterion set, Nevertheless, listed companies can easily know their value through the interplay of the markets. This can be termed as facilitates open assessment as opposed to self assessment. Since, itis the market Which gives the value of the company, therefore the assessment attained is an open and done by the mixtures of professionals, businessmen, firms representatives and the public in general + Listing of shares enables the company to increase the opportunities to venture into new investments and expansions by having alternative means of raising capital for such investments. Currently, there exists cooperation between the east affican securities regulators as well as cooperation of Bast African Stock Exchanges. The said cooperation has enabled the company wishing to expand its wings in the region, to list shares in other East Arian countries such as Kenya, Uganda and Tanzania thus, raising the opportunities for raising capital. Today there are thee Kenyan companies namely; Kenya Airways and East African Breweries Limited and Jubilee Holding Limited that are listed in the threes stock exchanges of Kenya, Tanzania and Uganda ‘There are cther packages that are associated with the listing of the shares with the DSE and have been listed in the DSE (2008) hand book as fisal incentives. Fiseal incentives: The government has deliberately provided several incentives in order to encourage active participation in capital markets by issuers and investors, DSE (2008) hand book further provides some incentives for the companies that list shares with it. The privileges include: Incentives to issuers: + Reduced corporate tax from 30-25% for the period of three years where the Issuer has issued at least 35 of the issued shares held by the public, The reduced rate is applicable for 5 years starting from listing date 226 + Tax deductibility ofall Initial Publie Offering (PO) costs for the purposes of income tax determination, AILIPO costs are accepted by the Tanzania Revenue researchersity (TRA) as acceptable expenses used in the generation of income and profits and therefore are taken into consideration when determining peoft for tax pusposes Withholding tax on investment income made by Collective Investment Schemes (CIS) is final tax, Investors in CIS are not charged with tax on the income. Incentives to investors: + Zero capital gain tax as opposed to 10% for unlisted companies + Zero stamp duty on transactions exceuted at the DSE. compared to 6% for unlisted companies + Withholding tax of 5% on dividend income as opposed to 10% for unlisted companies + Zero withholding tax on interest income from Tistod bbonds whose maturities are three years and above + Exemption of withholding tax on income accruing to fidelity fund maintained by DSE for investor protection Income received by the Collective Investment Seherne (CTS) investors is tax-exempt Disadvantages for isting shares: While there seem to be many advaniages, equally there exist some opposing Foroes at to the extent of such benefits of listing. For example the Virgin Company Limited of the United Kingdom, deregistered its shares from the London stock exchange for what it named improper management of resources by the new shareholders. The Virgin Company hha! che vievr that it had experienced dificulties in terms of progress after listing compared tothe period before listing sts shares with the LSE (Proshare, 2001). Below are some disadvantages: + Prolonged period for decision making even in circumstance of urgent need for such decision, This is beoause meetings are scheduled on specific dates and numbers of such mestings are known + Weak: ideas in meetings because the qualification for purchasing shares are essentially money rather than skills in that area, Hence, when the majorities shareholders are not familiar with the entre business the possibility of not assenting to viable solutions booome slim, hence distorting the performance of the company’ Investors protection: The qualifications for listing shares entail to protecting investors in stock exchange, DSE and CMSA study to ensure that firms that list shares areIni, Business Manage, 4 (4): 222-228, 2019 worthy and have no doubtful reputation in terms of professional performance. It is professional performance as opposed to necessarily reality of the firms’ performance. The financial statements and thus indicators presented in annual financial reports will solely depend on stewardship of the firms preparing such accounts information ‘As, Norman (2006) puts it, the beauty of laws including rules and regulations depends on the professional people administering such laws. Mere good accounts information dees not necessarily mean real good performance. In protecting investor, the provisions of the Capital Markets and Security ACT, 1994 the DSE has established a fidelity fimd account to be used to compensate investors who suffer financial loss arising from fraud and misappropriation of fimds by Licensed used to compensate investors who suffer losses as a result of Licensed Dealing Members (LDMs) negligence. The compensation amount is ourtently limited to TZS 100,000! (DSE, 2068, ¢) ‘CONCLUSION Tt can be observed that the DSE and the entire business researchersities sueh as capital market and sceurities autority have put in place rules and regulations tat act as qualifications for listing shares in a manner that saves to safeguard the investors of securities in Tanzania ‘The rules are evaluative and monitory in nature, They fre evaluative in the sense that they examine the performance of the firms before registering. An they are monitery since they keep on eying on the firms after listing with the DSE to see that they conform to healthy investment, Despite the presenee of rules and regulations securities are taded and thus do behave just like any other business Henceforth, the risks associated with the business must be bom by the investor. An investor must be able to realize good reasons for investing to each firm. 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