‘Removing bourse exemptions unwise investment’

18Jun 2016
Dickson Ng`hily
The Guardian
‘Removing bourse exemptions unwise investment’

REMOVAL of exemption on non-investment assets will slow down the country’s desire to have a vibrant capital market and retard the industrialisation dream, Dar es Salaam Stock Exchange PLC (DSE) has said.

Chief Executive Office Moremi Marwa

This was said at a Deloitte’s budget breakfast event held in Dar es Salaam on Monday by the bourse’s Chief Executive Office Moremi Marwa.

“The incentives were available as a means to promote stocks, it is a bad proposal for the market and the country,” he said.

According to him, when similar measures were imposed on listed securities at the Nairobi Securities Exchange (NSE), which is in fact the leader in East Africa, it couldn’t work as transaction in stock markets changes within a minute or second so one need to be careful.

“In the 2014/15 after the budget speech by Kenyan Minister of Finance, which introduced capital gains, investors refused to engage with the Kenyan bourse. As a result, NSE lost 40 percent of its investors within a few months from the effective date of implementation of the proposed tax which was January 2015,” he said.

“Market activities and liquidity significantly slowed down (market slumped by more than 70 percent within the first month of the tax being introduced on January 2015) and investors exited the Kenyan market, opting for other portfolio investment destinations such as the DSE, as well as stock exchanges in Nigeria, Egypt, Mauritius, South Africa, and Morocco,” he added.

The DSE boss also told the audience that NSE has been in existence since 1954 while the DSE started operations in 1998. NSE has 64 domestic listed companies and DSE has 17 domestic listed companies.

“DSE market capitalisation is about 8.3tri/- while the NSE market capital is equivalent to 46tri/-. On the other hand DSE market turnover (liquidity) is an average of 750bn/- per annum; NSE market turnover averages to 3,500bn/- per annum,” he said.

DSE has three listed corporate bonds worth 57bn/- whereas NSE has 30 listed corporate bonds worth 1,640bn/-.

The Dar es Salaam bourse listed government bonds are worth about 5tri/- while the Kenyan counterpart is worth 22trn/-. DSE has about 450,000 investors with CDS accounts but NSE has about 2,300,000 investors with CDS accounts.

According to him, the statistics alone indicate that the NSE is far ahead of DSE and that it was proper for the Kenyan government to have observed the wisdom of continuing to attract companies to raise capital through the NSE and encouraging both local and foreign investors to use the NSE for savings and investment activities via fiscal incentives.

A licensed broker, Moremi quoted President Uhuru Kenyatta when he was signing the bill that abolished capital gains tax as saying: “this tax really affected our market in terms of interests from foreign investors. It has been disincentive. It sent a lot of jitters through the market.”

In one of his writings, Moremi says: “I am not certain as to whether rumours were on the air that the removal of tax incentives on the DSE listed securities was coming, because for the past 3-years, this quarter (April todate) is the worst recorded performing quarter in terms of liquidity and capital gains which informs market capitalisation.

“DSE quarterly trading turnover has been an average of 200b/- for the past 3-years; however, April to date DSE turnover is less 50b/- and we are only two weeks towards end of quarter. That says something.”

Moremi, who was a Senior Manager in Ernst & Young’s Transaction Advisory Services before joining the bourse, is of the view that one of the major reasons for the establishment of the capital market in the country was to create an efficient financial system that will facilitate investment and financing of businesses and government projects.

“To motivate the creation of a vibrant capital markets the government has been providing fiscal incentives to catalyze and encourage the use of the capital markets in mobilizing financial resources for onward investment in identified economic ventures of both public and private nature. As it is, our market is still relatively very small to consider revised the spirit of existence of these incentives,” he noted.

According to him, listed companies shouldn’t be treated the same as non-listed, due to the fact that among other factors listed companies decided to share their prosperity with other many people in the society.

They also provide economic empowerment and wealth creation to many people in the society as well as facilitating creation of employment.

One of the government proposals on reforms of tax structures for the coming fiscal years is the removal of exemption on non-investment assets (shares), which the government thinks would increase the tax base as the same item which enjoy a reduced rate of 5 percent on dividend.

According to the government, the amendments would include deleting paragraph (d) under section 3 in the definition of “investment asset” on shares or securities listed in the DSE that are owned by a resident person or a non resident person who either alone or with other associate controls less than 25 percent of the controlling shares of the issuer company.

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