CAPITAL MARKETS AND SECURITIES LAW

TOPIC ONE

INTRODUCTION
Definition of Basic Terms

1 Capital Markets

These are markets (could be exchange or other places) at which, or facilities by means of which
securities are regularly offered for sale, purchase or exchange. They are facilities which facilitate
movement of funds form surplus units to deficit units. They are also called stock markets.

2 Securities

These are things which are given or deposited to make certain the repayment or fulfilment of
an obligation, be it monetary or otherwise. They include debentures, stocks, shares, bonds or
notes by bodies corporate or the government, as well as other instruments as may be
prescribed by the Minister for Finance.

Fundamentals of Capital Markets

In order to understand what capital markets are all about, it is important to know the position
they occupy in a country’s financial system. The economy of a country is dependent upon a
sound financial system for its growth. Particularly, it needs long term finance.

A financial system is to the economy what grease is to moving parts of the machine. As grease
lubricates the machine and enables it to work efficiently, the financial system plays the role of
intermediation by facilitating movement of funds form savers (surplus units) to users (deficit
units).

What is a Financial System?

Admittedly, there is no universally agreed definition for a financial system. However, majority of
scholars have defined it as a collection of financial markets which deal in financial instruments,
including those which pay back in a shorter time, usually less than a year, known as money
markets and those whose tenure is longer known as capital markets. They also include foreign
exchange markets. They all play the role of financial intermediation through which funds move
from idle holders to productive users at a market price.

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Money Markets

These are financial markets which deal in financial instruments whose tenor is short, usually
less than a year. It involves dealings in money markets such as open market operations under
repurchase agreements [i.e. agreement for sale of treasury bills or other securities with
commitment by the seller to buy the securities back at a specified price and designated future
date].

These dealings usually take place between the Central Bank and Credit institutions or between
the Credit institutions themselves. As typical money market paper is a treasury bill.

At present, dealings in money market by the Bank of Tanzania comprise of treasury bills and
repurchase agreements. Open market operations have been taking place exclusively with
ninety one day treasury bills [liquidity papers] the proceed of which are sterilized in a blocked
BOT account while 181 day and 364 day treasury bills [financing papers] have been used for
financing the government deficits.

Foreign Exchange Markets

These involve banks and bureau de change which deal in foreign currency balances-supply and
demand of foreign currency in the market determines exchange rates, the government eased
foreign exchange restrictions by enacting the Foreign Exchange Act in 1991 which among other
things authorized the operation of bureau de changes.

Capital Markets

These are markets which deal in financial instruments whose tenor is long. They provide long
term finance. Traditionally, bank loans and government subsidy has been the major sources of
capital for companies and other entities in Tanzania. Therefore, the institution of capital
markets as capital provider can be said to be an emerging phenomenon.

Naturally, there is a noticeable absence of public companies in the country [TBL, TCC, TOL etc].
There is only one stock exchange in the country, the Dar es Salaam Stock Exchange (DSE), and
pension funds have for long been the only collective investment schemes before the recent
establishment of the Unit Trust of Tanzania. Even the first law regulating the capital markets
industry, The Capital Markets and Securities Act came into force on 1 st October 1994.

Roles of Capital Markets in a Country’s Economy

1. Pooling of funds from different sources to create capital.

2. Financial intermediation i.e. moving funds from those with extra to those with investible
projects.

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 3. Packaging of financial assets according to investors’ appetite.
4. Allocation of resources in an efficient and economic manner.
5. Risk distribution.
6. Competitive transfer (pricing) of capital resources.

Types of Capital Markets

Capital markets are divided into; Primary markets and Secondary markets.

(a) Primary Markets

This is a place where securities are issued or sold to the investors for the first time by the
issuers. Issuers are all entities which sell financial assets.

Characteristics of Primary Markets

1. Securities are issued to the investors for the first time. They do not belong to anybody in
particular before that. They are issued through a process called Initial Public Offering
[IPO].
2. The prices of securities are usually fixed.
3. No commission is payable to the brokers when securities are sold in primary markets.
4. All costs associated with the sale of securities are born by the issuer and all the proceeds
collected go the issuer.
5. The time for issuing the securities through an IPO is usually fixed.

(b) Secondary Markets

This is a place where the securities bought by investors during or after the primary market are
sold, bought or they exchange hands between investors.

Characteristics of Secondary Markets

1. Securities are not sold for the first time.

2. The market price is usually not uniform. Prices of securities keep on fluctuating
depending on the underlying economic fundamentals surrounding the issues.
3. Commission is usually payable to brokers.
4. The secondary market is open throughout the listing life of a given entity [a company
etc] as long as it is in business.
5. Costs are born by the investors and proceed of sale go to the investors.

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 TOPIC TWO

CAPITAL MARKETS: LEGAL FRAMEWORK IN TANZANIA

Background: Reforms in the Financial Sector

Because of the changing economy in the late 1980s, the law had to undergo changes to catch
up. Thus, most laws regulating the financial sector were reformed. They include the laws
regulating banking and financial institutions, [BFIA, 1991] the foreign exchange laws [FEA,
1992], Fair Trade Practices Act, 1994, BOT Act, 1995, Insurance Act, 1996 etc. Capital Markets
and Securities sector was not an exception. The CMSA was enacted in 1994.

The regulatory framework of the Capital Markets and Securities Industry in Tanzania is built on
three structures:

1. Acts of Parliament. These may either be direct or indirect. The direct statute is the
CMSA, [Cap. 79 R.E. 2002] formerly Act No. 5 of 1994. The indirect statutes include the
Foreign Exchange Act, The BFIA, The Income Tax Act and The Investment Act.
2. Various Capital Markets Regulations make under the principal legislation, particularly
under the CMSA. There are such regulations as CMS (Prospectus Requirements)
Regulation, CMS (Collective Investment Schemes) Regulations etc.
3. Listing rules of the DSE popularly known as Blueprint Rules of DSE.

The Importance/Essence of the Regulatory Framework

1. It helps to regulate the integrity of the players in the market.

2. Investors Protection against malpractices as the CMS industry is a very technical one
requiring immense expertise.
3. Promotion of transparency. All dealings in the capital markets are supposed to be
transparent and any breach of the same must be punished.
4. Promotion of certainty and predictability. Market players should be able to infer how the
regulatory authorities or institutions will view their conduct and be certain of consequences
of certain transactions.
5. Limiting the opportunities of abuse or fraudulent activities.

The entities regulated by the CMS law include: the issuers, investors, central depositories,
custodians, investment banks, clearing banks, lawyers, accountants, auditors, valuers, fund
managers and other professional advisors.

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 SALIENT FEATURES OF THE CAPITAL MARKETS AND SECURITIES ACT
The CMSA is the major legislation regulating capital markets and securities industry in Tanzania.
It establishes CMS Authority which is the government’s enforcement agency of this law.

The CMSA is a body corporate with all the features of a body corporate whose composition has
the Chairperson, four members from either legal, financial, business or administrative sector
and five ex-officio members [Principal Secretary of the Treasury, the Governor of the BOT,
Registrar of Companies, the Attorney General or persons dully designated by any of them and
the Chief Executive of the Authority-See section 6 of the CMSA.

Among other things, the key functions of the CMSA include:

a. Advisory. Advising the Minister for finance on all matters relating to securities industry.
b. Surveillance. To maintain surveillance over securities to ensure orderly, fair and
equitable dealings in securities.
c. Registration, licensing and approval. To register, license and authorize or regulate all the
players in the industry including the stock exchange, investment advisors, dealers etc.
d. Guidance. To formulate principles for the guidance of the industry.
e. Creative role. To create necessary environment for the orderly growth and development
of the capital markets industry.
f. To undertake such activities as are necessary for giving full effect to provisions of the
CMS Act. See section 10 of the CMSA.

In order to allow the CMSA to perform each one of its functions, and to generally effectively
regulate the industry, the CMS Act has been designed to cover four main areas which are;

I. Provision of access to business in capital markets.

II. Regulation of conduct in securities business.
III. Protection of investors.
IV. Dispute resolution.

I PROVISION OF ACCESS TO BUSINESS IN CAPITAL MARKETS

In this respect, the Act lays clear the manner through which various entities can make their way
into the capital markets business. It provides for establishment, licensing and approval of such
entities as the stock exchange, license dealing agents, investment advisors etc.

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The Stock Exchange

The stock exchange is any body corporate which has been approved by the CMSA to operate as
a stock market. See sections, 2 and 25 of the CMSA.

For an approval to be granted to a body corporate to become a stock exchange, it should have
all of the following three features;

a. It should have at least three members who will carry on business of dealing in
securities independent of, and in competition with each other. [definition of
member dealing in securities-See section 2 of the CMSA].
b. It should have rules which make satisfactory provision on: exclusion of members
who are not of good character and high business integrity,
- Exclusion, suspension and disciplining of members for contravention of rules of the
stock exchange.
-reporting of any rejection of application for membership, suspension or expulsion
of a member, suspension of trading in particular securities.
-Terms and conditions of the CEO of the exchange including the fact that the CEO
shall not be liable to dismissal or removal without prior approval of the authority.
-Conditions for listing of securities in the proposed market.
-Obligation of the issuers of securities.
-Fair representation of persons in selection of its council members [definition of
council See section 2 of the CMSA].

c. It should serve the interests of the public. See section 2 of the CMSA.

An approval granted for a stock exchange is perpetual unless suspended or cancelled by the
authority.

The License Dealing Members

These are such entities as dealers, stockbrokers, investment advisors, custodians, central
depositories and fund managers. They must be licensed by CMSA before they can undertake
their business.

Dealers and Brokers

Dealers are license dealing members who besides being able to deal in securities on behalf of
other persons as agents, may also deal in securities on their own account as principals. See
section 61 of the CMSA.

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Brokers are license dealing members who carry on the business of dealing in securities
exclusively on behalf of other persons as agents-they may not deal in securities on their own
account as principals.

Before anybody corporate or any person is given a license to deal in securities either as a dealer
or a broker, the following requirements must be fulfilled:

a. Capital adequacy-it must possess prescribed minimum capital as directed by the law.
The capital for dealers is usually higher than that for dealers.
b. It must have management team of people with integrity, not embezzlers or persons
with criminal records.
c. Must have employees with requisite education and experience relating to financial, legal
and administrative matters.
d. Must have an authorized dealer’s representative who is normally an individual who has
passed a dealer’s examination conducted by the CMSA.
e. Must not be under receivership or bankruptcy process or any other winding up process.

Both, the dealers and brokers must be licensed by the CMSA. See section 32 of the CMSA.

However, there is a special category of dealers known as Exempt Dealers. There are institutions
which deal in securities because the nature of their business requires them to do so. They are
usually banks as defined in the BFIA and any other persons that the Minister of Finance may
categorize as exempt dealers. These dealers are exempted from applying for grant of licenses
from the CMSA but they are obligated to observe all the other requirements as they apply to
other dealers. See section 49 of the CMSA.

Investment Advisors

An investment advisor is any person who carries on business of advising others concerning
securities, ir who as part of a regular business, issue or publishes analyses or reports concerning
securities, or who pursuant to a contract or an arrangement with a client, undertakes on behalf
of the client, the management of a portfolio of securities for the purpose of investment. See
sections 2 and 3 of the CMSA.

Just as the case is with dealers, the CMSA provides for the requirements of capital adequacy,
education and skills, integrity, and absence of receivership or bankruptcy process for any body
corporate or any other person who desires to be licensed as an investment advisor.

All licenses are renewable on an annual basis. The licenses are deemed to be revoked where
the holder, if an individual, dies or if a corporate, is wound up. Moreover, the CMSA may revoke
a license if any if the following happens:

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 i. Where the holder is an individual-levy of execution, cease to carry licensed business,
bankruptcy, offence of fraud or contravention of license conditions. See section 46
(2) (a) of the CMSA.
ii. Where the holder is a body corporate-winding up/dissolution, levy of execution,
receiver appointed, composition arrangement/an agreement with creditors, cease
to carry on business or contravention of license conditions.

II REGULATION OF CONDUCT IN SECURITIES BUSINESS

The CMSA has provisions which prescribe the manner in which business is supposed to be
conducted in capital markets. There are conditions which are encouraged and those which are
prohibited. The whole of Part VI of the Act addresses conduct in the business.

Section 57 prohibits any licence holder to make representations that his abilities or
qualifications have been approved by the CMSA, except for the fact that he is a holder of
license under the CMSA.

Section 58 obligates dealers and brokers to give contract notes to their clients (persons for
whom they enter into transactions) and persons with whom they enter into transactions where
the transaction do not take place in the ordinary course of business in a stock exchange.

Investment advisors are prohibited to make recommendations to investors if they do not have
reasonable basis to make such recommendations. See section 60 of the CMSA.

The law allows dealers to deal in securities in their own capacity as principals but only after they
have informed their clients that they are going to do so, see Section 61 of the CMSA. Moreover,
it is prohibited for dealers and investment advisors to extend unsecured credit to their
employees or persons associated to their employees if the same is to be used for purchase of
securities. Section 62 of the CMSA.

The Act also requires dealers to always give priority to client’s orders. They should not purchase
securities on their own as principals or on behalf of their associates, before they do so for
clients, if they have instructions from their clients to purchase the same class of securities-see
section 63 of the CMSA, unless the order by the client was subject to conditions which the
dealer could not obtain.

Dealers are not allowed to use client’s money for purposes other than those stated by the
client. Therefore, dealers have to maintain client’s accounts where all the money deposited
with, or lent to the dealer, by clients will be deposited. See section 64 of the CMSA.

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The Act prohibits short selling. This is a practice in which securities are sold by a person who at
the time of sale does not have an existing exercisable and unconditional right to vest the
securities in the purchase. See section 65 of the CMSA.

Under section 106, the Act prohibits False-trading. This is a situation where a person does
anything that created or is calculated to create false impression that there is an active trade in
securities in a stock exchange. It also involves a situation where a person sells or purchase
securities without occasioning a change in the beneficiaries of those securities or where a
person, by any fictitious means maintains, inflates, depresses or causes fluctuations in the price
of securities.

Stock Market Manipulation is also an offence under the Act. This is a situation where a person
takes part in two or more transactions which are likely to have effect of raising, maintaining or
stabilizing the price of securities of a body corporate in a stock exchange with intent to induce
other persons to sell, purchase or subscribe for securities of the body corporate. See section
107 of the CMSA.

The Act further prohibits insider dealing. Here, it prohibits any person to deal in securities of
any body corporate if he is in possession of certain information, resulting from his association
with the body corporate, which is not generally available to the public but if it were, it would
have materially altered the price of securities. See section 112 of the CMSA.

The Act also prohibits Churning. This is an offence that is committed by a dealer or a broker
who has been given discretionary powers by a client to either sell or purchase securities as
market forces will operate or dictate, but uses the power for the sake of increasing his
commission.

III PROTECTION OF INVESTORS

Investors have to be protected because the industry is very technical and most of them are not
expected to be knowledgeable in it. There are both indirect and direct methods of protection
provided by the law.

The indirect methods of protection include:

a. Provisions and Regulations which prohibit certain practices in the industry.

b. Provisions and Regulations which impose obligations on expert players in the market
such as dealers and investment advisors e.g. those which obligate the dealers to
maintain correct records of all transactions on behalf of their clients.

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 c. The requirements of capital adequacy in which brokers, dealers, trustees, investment
advisors and other expert players are required to have certain minimum prescribed
capital, and to maintain, at all times, liquid assets enough to cover current
indebtedness. This is to ensure that their accounts have money from which their clients
may be compensated.

The direct methods of protection include:

a. The Bank Guarantee Bond. Every broker or dealer must have a bank guarantee bond
which shall be used to cover against theft, fraud or dishonesty of employee (s) of a
dealer or broker. In case of complaints, this is the fund of first resort.
b. The Investor Compensation Fund (Fidelity Fund). Part VIII, section 83, 86 and 94 of the
CMSA. Every stock exchange is required to keep a compensation fund from which
payments will be made to investors who may suffer pecuniary loss from any defalcation
committed by a broker or a dealer.[defalcation=illegal use of money by someone who is
entrusted to use it for a specific purpose]. In case of claims, this is the fund of last resort.

IV DISPUTE RESOLUTION
The Act has also addressed the area of dispute resolution in the industry, they being an
inevitable part of the business. Some of the most common disputes in the industry are those
which involve:

a. Misappropriation of client’s funds by dealers/brokers.

b. Pledging of client’s securities by dealers or brokers to borrow money.
c. Non-remittance of the collected proceeds to the issuer, by the agents.
d. Non-remittance of dividends.
e. Use of client’s money to purchase securities which are not specified in the mandate
given.
f. Late transfers and or registration of securities.
g. Appeals against disciplinary measures such as against suspension of dealers/brokers.
h. Alteration of mandate without client’s consent.

Parties to most disputes are likely to be license dealing members between themselves, LDM
against clients, the stock exchange versus LDM, CIS, CMSA and other arrangements, the CIS
versus investors etc.

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The levels of dispute settlement have been as follows:

First and foremost, all the approved and licensed entities are required by the Act to have
dispute settlement mechanisms. This is also a DSE requirement. If the entities fail to resolve
disputes, they step to the exchange for arbitration. An appeal from decision made by the
exchange is lodged with the CMSA and further with the Minister for Finance. The final state is
the review by the High Court-see section 28 and 49 of the CMSA.

TOPIC THREE

GOING PUBLIC [PUBLIC OFFERS]

Before securities are traded in any exchange, they must be issued to the public. Securities of a
private company cannot be traded in an exchange.

Going public refers to a process of issuing company’s securities through initial public offering
(IPO).It is basically a process in which a business owned by one or several individuals is
converted into a business owned many, It involves the offering of part ownership of the
company to public through sell of debt, or are commonly equity securities

In an IPO, These securities are sold to the public for the very first time. This is a preferred
method of obtaining capital by companies and other entities as it is less expensive in
comparison with long term loans.

The IPO process is governed by an interlocking set of laws, rules and regulations. The most
important among these are the companies Act, the Capital market and securities Act and the
CMS (Regulations). Each of them has requirements for a company that wants to go public.

Requirements under the company’s Act (Registration requirement)

1. The issuer must be a fully constituted public company.

2. Articles of association must allow transferability of shares.

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 3. The articles must provide for freedom to invite the public to subscribe for the shares of
the company.
4. The articles must prohibit pre-emptive rights.
5. Shares must be fully paid up.
6. The company must issue a prospectus approved by the CMS Authority.
7. The company must have all requisite resolutions for going public.

Requirements under the CMS Act are contained in the CMS (Prospectus) Regulations

Under the regulations a company wishing to go public and get listed in stock exchange must
publish extensive information about itself in a prospectus.

A prospectus is in law a disclosure document. It explains the financial facts important to an

offering. A prospectus is however in practice used as a marketing document to solicit orders. A
prospectus must precede or accompany the sale of a primary offering.

As a general rule a prospectus must be comprehensible to an illiterate investor and must

disclose in rather extensive details, the following:

I) Information about the issuers capital

1. Issued (share) capital of the company.
2. Any alteration of the authorised share capital in the past two years if any.
3. Changes in the issued capital.
4. Classes of shares created from that capital.
5. Description of rights and obligations of each class of shares.
6. Number of shares expected to be issued.
II) The prospectus must disclose persons who constitute the board of directors,
management and senior staff. The disclosure should show their experience,
expertise in the business as well as educational qualifications.
III) The history of the issued business, this includes the nature of the business and the
business development plans.
IV) Financial information

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 1. Statement of adequacy of working capital for present needs of the issuer
(normally for six months).
2. Statement of how the money raised is going to be used.
3. Breakdown of the expenses incurred I the preparation of the prospectus.
4. A clause that tells the investor about the risk and how the issuer is prepared to
handle them (a risk factor clause).
5. The duration of patents, trademarks and other intellectual property rights.
6. Sources and availability of the raw materials if the issuer is under production.
7. The extant of dependency on a single customer or a group of customers.
8. The percentage of revenue from domestic customers and foreign customers.
V) Assets, liabilities and losses.
It must have a chapter for balance sheet for at least three years; it must have
income statement of at least three years. Must have auditor’s report for the last
three yeas, pending litigations, accounting policy of the issuer present and
contingent liabilities, details of all material contracts within two years prior to going
public and details of primary plans and equipments owned by the issuers.
VI) Director’s interests in the assets in the issuer’s capital. The percentage of the
principal share holders, directors and the key managers’ interest in the share capital
of the issuer. it must also disclose any material disposition or disposition of shares of
any director within one year prior to the offer and whether there is an option for
directors to buy shares within one year prior to IPO.
VII) Legal opinion, A document showing all the laws that will impact a certain
transaction:
1. Whether the issuer has requisite licence to perform that business.
2. A lawyer has to give comfort to investors that all consents authorisations by the
relevant authorities have been obtained.
3. Validity of ownership of all movable and immovable property must be assured
4. All material contracts relating to issue of shares.

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 5. An extract from the articles of association of a company clearly indicating the
kind of general meeting of the company and how the directors are elected and
removed.
6. Consent of each expert whose report/opinion is used in the prospectus.
7. Clause indicating the type of document that are made available for the public
inspection e.g. MEMARTS, accountant reports etc.
8. Other mandatory statements:
 ‘A copy of this prospectus has been delivered to the authority for
approval and registrar of companies for registration’
 ‘The securities offered here have neither been approved nor disapproved
by the authority’
 Prospective inspectors should carefully consider matters set forth under
caption ‘risk factors’

Requirements under the blue print D.S.E. rules (some listing requirements)

i) Existence of at least three years before listing.

ii) Issued and paid up share capital of at least 500 million Tshs.
iii) Must have been incorporated in Tanzania as a public company or in another country
where the law is in conformity with Tanzania Company law as cross listing company.
iv) Net tangible assets worth at least 500 million Tshs.
v) At least 25% of the issued and paid up share capital must be in the hands of the
public.
vi) The minimum number of share holders must be 1000.
vii) The issue must have been under the same management for at least two years.
viii) The issuer must show evidence that the prospectus has been approved by the CMS
authority and registered by company’s registrar.
ix) The company must have been making profits attributable to shareholders for at
least three financial years.
x) Payment of listing fees.

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Documentations required in the process of Going Public

The issuer who intends to go public must prepare and submit a set of documents to various
authorities. The key authorities are the registrar of companies, the CMS Authority and the
exchange.

To the Office of the Registrar

1. All resolutions passed by the directors and the shareholders authorizing conversion of
the status of the issuer from private to public company.
2. Share holders’ resolution authorizing public issuance of shares.
3. Resolutions amending articles of association to comply with all the requirements of a
public company.
4. A copy of duly amended MEMARTS.
5. A copy of prospectus.

All these documents are open to public inspection at a fee.

To the CMS Authority

1. Application for the approval.

2. A prospectus both draft and final.
3. All requisite approval with relevant authorities which regulate the issuer’s branch of
business.
4. A copy of the MEMARTS together with a certificate of incorporation.
5. A copy of any proposed underwriting agreement with respect to shares offered to the
public.
6. All resolutions submitted to the registrar of companies.

To the Exchange

1. An application for listing.

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 2. An allotment report.
3. MEMARTS and certificates of incorporation.
4. Underwriting agreement.
5. Resolutions.
6. Prospectus duly approved by the CMS authority.
7. An undertaking by the issuer to comply with the continuous listing obligations.

Roles of Various Professionals in a Share IPO

In floating shares to the public various parties perform various functions (roles)to make an IPO
a success, they include:

1. The Board of Directors

Normally the process of an IPO begins with proposal by the management to change the
company from private into public. The board of the directors is the one that approves the
proposal. The board must be constituted by persons with requisite experience and expertise in
the industry in which the issuer is doing business. This enables them to make informed
decisions. If the board approves the proposal, it is forwarded to the company’s general
meeting. Final approval to go public is normally given by the general meeting. Once approved,
selection of the team of lead advisors follows.

2. Lead Advisors

These must be firms licensed by the CMS authority as investment advisors. They must have
transaction experience, industry experience and market making and research capability. They
are the advisors to the issuer relating to all issues of business. They coordinate activities of the
IPO.

3. A Sponsoring Broker

This is a person who is licensed either as a dealer or a broker by the CMS authority. This is a
person who does the link function. He links the issuer to the market and vice versa he submits
to the exchange and other regulatory authorities document to support application, scrutinises

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the accuracy of information provided to the regulators, help the issuers to comply with
requirements of going public and finally forwards the prospectus to the CMS authority and the
exchange for approval and listing respectively.

4. Legal Advisor (lawyer)

i) To prepare the initial and preliminary meeting after having received all the necessary
information about a company. Wishing to go public, a lawyer convenes a meeting of
all professionals. This is for plan and review and strategy. Normally this meeting
features accountants, analysts economists etc so that they may propose
approximate figures.
ii) To prepare a confidentiality letter

This is a letter that commits the various professionals to confidentiality throughout the
process of an IPO of a given company; it is prepared by a lawyer and signed by the
professionals. Any information involving sale of shares of a company is confidential.

iii) To prepare an IPO timetable

A lawyer prepares a timetable that shows all the steps and the relevant laws and the
deadlines in the laws e.g. when should the notice be given and what is the limitations of
giving the prospectus is. A lawyer advises the other professionals on the timetable and
when they agree they sign it.

iv) To prepare the service agreements

This is a document that specifies the terms of service between a client and the professional

v) Advice on the terms of reference

What each person must exactly do, here the lawyer only gives advice because he cannot be
sure of what exactly be done by professionals.

vi) To draft a request for documents

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These are documents which are needed to enable the lawyer and other professionals to
make thorough investigation of the client. This investigation is technically known as due
diligence. This is because information to be released to the public about a company must be
accurate.

Due diligence may be financial, audit, marketing, technical and legal.

Legal Due Diligence

In legal due diligence, the lawyer will go through the following documents:

i) Corporate documents

These include the MEMARTS, certificates of incorporations, bond resolutions, the business
(sectoral) licence and other subsidiary documents. This is meant to ascertaining whether
there are any provisions restricting IPO’s corporate authorization of IPO, need to change
MEMARTS, and if there are regular meetings and whether resolutions were passed by the
authorised people.

ii) Securities of the company

This is to find out whether there are proper share certificates? Who hold them? Number of
shares and who owns them and conditions for classes of shares

iii) Contracts and agreements

These includes bank lending agreements, joint venture and partnerships agreements, share
holders agreements, licence agreements for use of technology, leases of equipments,
mortgages, insurance contracts and other additional contracts.

iv) Government documents

Licences (e.g. from local governments), enquires or investigations made by the government
into the company (e.g. TRA), sector registration, the income tax report.

v) The management and personal documents

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 Management and labour agreements, labour agreements, labour disputes, pension
agreements, compensation agreements, profit sharing between management and
employees, healthy measures , list of company directors etc. the aim is to ascertain the
integrity of the company whether the IO is likely to affect the employees because if so they
may divulge information

vi) Property documents

Company property register, list of all movable and fixed property, any property survey
report, expansion plans, intellectual properties. The reason is to ascertain whether all the
property actually belong to the company.

vii) Other company information

General information such as press release, any articles I newspaper relating o the company,
company newsletter (if any) etc. this enables the lawyer to access information that might
not be in the company’s records.

viii) Court litigations

Quantum of claim and liability against the company, costs of litigation, probability of
success, potential damages and suits, criminal litigation or insolvency proceedings.

TOPIC FOUR

PUBLIC ISSUANCE OF BONDS

In Capital Markets, a bigger portion of funds raised to finance long term development is
normally raised through issuance of corporate bonds.

Bonds are interest bearing securities which pay interest on a given maturity date. Bonds being
debt instruments may occasionally be confused or may look similar to bank loans. However,
bonds and bank loans differ substantially even if they have similar tenors. The following are key
differences between the two:

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 1. In bonds, the lenders are multiple investors as each one buying the bond is lending
money to the issuing company. In bank loans, the lender is the bank itself and alone.
2. In bonds, the relationship created by the transaction is one-to-many. In bank loans, it is
a one-to-one relationship.
3. Bonds have a secondary market i.e. there is a mechanism of trading in bonds. There is
no secondary market for bank loans.
4. Interest rates payable on bonds are normally either fixed of floating, for bank loans,
interest rates are always fixed.
5. Bonds are more liquid than bank loans since they can be traded in a secondary market.
They can be exchanged easily.

Types of Bonds

Bonds are categorized basing on two aspects; legal statues of the issuer and special features
underlying them.

Classification According to Legal Status of the Issuers

1. Government Bonds. These are issued by sovereign states. They can be long dated, short
dated, or medium dated depending on when their maturity dates fall. Sometimes
governments issued bonds without maturity dates; these undated bonds are known as
irredeemable bonds.
2. Municipal Bonds. They are issued by municipalities or other local government
authorities. Like government bonds they can be long, short or medium dated.
3. Corporate Bonds. These are bonds issued by companies. These constitute the most
important types of securities in bond markets. They are usually at least as big as, if not
bigger than government bonds. The yield on bonds with similar terms will vary
depending on the perceived quality of the company issuing them. Independent quality
rating by independent rating companies attempts to measure companies’
creditworthiness standing objectively.
4. Euro Bonds. These are bonds issued by international organizations and companies. They
are sometimes also issued by sovereign governments. They are normally issued in
multiple numbers of currencies.

Issuers of Euro Bonds usually obtain cheaper financing abroad than is possible in the home
market or too much revenue in particular currency with interest payment in that same
currency.

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Classification According to Special Features

1. Convertible Bonds. These are similar to conventional corporate bonds but have an extra
date and a coupon. They also carry on inbuilt option that the holder can exercise power
to convert the bond into shares of the company at a specified price at a particular time.
2. Zero Coupon Bonds. These bonds do no pay interest in cash terms but they are issued at
a massively discounted price to the one they will eventually be paid [bought back]. The
returns come from capital gain of the period in question.
3. Index-Linked Bonds. These are bonds which are linked to an underlined inflation
barometer. Interest is calculated and repayment of the principal amount is adjusted
according to the movement in the benchmark consumer price index. The aim is to avoid
the corrosive effect that inflation may have in performance of bonds.
4. Junk Bonds. These are corporate bonds issued by companies with law credit standing or
unknown companies or well known companies with poor financial standing. The risk of
default is higher. They therefore offer very high yield to tempt investors who have to
decide whether the yield is tempting enough to offer the greater risk of default.

Salient Features of Bond Issuance

A bond issuer is obligated to prepare a disclosure document known as information. Like a

prospectus, this document is in law, a disclosure document but in practice, a selling document.
It is the only document allowed to be disseminated to the public.

An information memorandum is prepared by both the Lead Advisor and the Legal Advisor.
Experience has shown that it is always the legal advisor who does the publishing of the final
document to make sure that is contains the necessary information required by both the CM
Regulations and Listing Rules of the exchange.

In particular, information in the memorandum must disclose the following:

1. Name of the issuer and its legal status.

2. The aggregate nominal amount intended to be raised.
3. Provisions relating to interest payable.
-Whether it is fixed, floating or zero.
-If floating, the floating difference rate and margin.
-Interest commencement date.
-Interest payment interval.
-Interest determination date, if floating.
-Maximum and minimum rate of interest.

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 4. Final maturity date of a bond. Bonds differ in lifespan. It is important to know the final
date of maturity of the bond invested because the principal and interest have to be paid
by the borrowers [issuers] on this date.
5. Issue date i.e. first date of issuing the bonds.
6. Denominations of the bonds, where they have been broken down to make them more
affordable.
7. Issue price and currency.
8. Use of proceeds to be raised categorically.
9. Redemption terms-terms on the company buying back the bonds before maturity dates.
10. Clause to show whether the bonds are secured or unsecured. Where investors are
worried about credit worthiness of the company, they may demand secured bonds.
11. Call provision if any property is under pledge.
12. Negative pledges i.e. where pledged assets are mortgaged. This is not a clean pledge
and investors are at a higher risk.
13. Tax treatment e.g. all bonds which have 3 years and above tenor are exempt from
stamp duty.
14. Method of allocation/allotment in case the issue is oversubscribed.
15. The timetable for issuance.

Professionals in Bonds

The Arranger

He is the coordinator of all the personnel in an IPO of bonds. He finds investors and negotiates
on their behalf with the issuer. This is important because bonds involve multiplicity of
relationships between the issuer and the investors [each one of the bond subscribers] and the
arranger serves the purpose of easing communication between the two sides.

A Placing Agent

This is the person who looks for prospective investors in a Private Placement. One of the ways
through which bonds are sold is called Private Placement under which a corporate, instead of
issuing bonds to the public at large, singles out some individuals from the public as prospective
investors to buy the bonds. The function of singling out these investors is done by the Placing
Agent.

A Bond Trustee

This is a person who holds, in trust, funds for the investors. Bond trustee is appointed by the
investors to take care of their interests in a bond transaction. In case of default on the part of

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the issuer, for instance, he is the one who sues as a representative of the investors. Normally,
the arranger is also a bond trustee.

A Fiscal Agent

This has similar functions as a Lead [Financial] Advisor in a share IPO. It must be a body
corporate, normally a bank, with transaction and industry experience as well as research
capability and ability to coordinate all the financial aspects of a bond IPO.

A Sponsoring Broker

He links the issuer to the market on the one hand, and issuer to the investors on the other
hand.

Legal Advisor

Prepare legal opinion on the state of the company during the issue.

A Reporting Accountant

Bond Registrar/Transfer Agent

This is an entity which does actual transfer of securities from the issuer to the investors as well
as registering them.

TOPIC FIVE

RAISING MONEY THROUGH COLLECTIVE INVESTMENT SCHEMES [C.I.Ss]

A CIS means:

a. An open-ended investment company.

b. A unit trust scheme.
c. Any other arrangements being arrangements with respect to property of any
description, including money, the purpose or effect of which is to enable persons taking
part in the arrangements [whether by becoming owners of the property or any part of it
or otherwise] to participate in or receive profits or income arising from the acquisition,
holding, management or disposal of the property or sums paid out of such profits or
income;
d. Any other scheme or arrangement deemed by the Authority to be a CIS.

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In simple terms, CISs are vehicles that permit investors to participate in securities market by
pooling together funds and investing in a portfolio of securities selected in a professional
manner and managed by professional advisors.

CISs involve an aggregation [pooling] of resources from a variety of investors. In this respect,
companies would look similar to CISs. However, CISs and companies manifest some differences:

1. For a CIS, investment target is specific i.e. to invest in marketable or liquid securities that
are those which can easily be converted into cash. This target gives CIS a liquidity
advantage which is significant especially for those schemes which are said to be open
ended. [open ended investment companies are those whose shares can be sold and
bought back from the shareholders-“continuous process”]. Normal companies are not
allowed to redeem their shares. Closed ended schemes (companies) do not buy back
their shares. They do not have a mechanism which allows shareholders to sell back their
shares. The only mechanism that can be used is through an exchange [secondary
market]. It is therefore a lot easier to exit out of an open ended investment company
than it is for a closed one.
2. There are also structural differences between the two. For example, a unit trust usually
has a Manager who is independent of Unit holders and who executes his duties in a
professional manner. The Manager is usually an investment advisor. This is the one that
undertakes to incorporate a scheme by entering an agreement called a Trust Deed with
custodians, normally banks. The manager manages the scheme whereas the custodian
takes care of the property of the scheme and ensures that the manager conducts his
business in accordance with the trust deed.

—On the other hand, the manager of a typical Limited Liability Company is appointed by
the Board of Directors and is responsible to the Board.

—A company is launched by shareholders whereas a scheme is launched by a manager

in agreement with a custodian after approval by authorities.

3. There is a marked difference in the valuation approval of CISs and limited liability
companies. Valuation of various types of assets in a Limited Liability Company makes it
cumbersome and complex particularly when it involves goodwill. In view of assets which
CISs invest in, valuation is done regularly by valuing the security in which the scheme
has invested and deducting liability of the scheme so that the end result is the net asset
value.

As the list in the statutory definition of CISs indicates, a variety of CISs can be established. The
most common is the Unit Trust, sometimes called the Mutual Fund. Furthermore, there are
various types of schemes which may be launched as unit trusts depending on the type of assets

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in which the fund invests. Investible assets may include shares, debt instruments, money
market instruments, real estate, derivatives etc. There are also funds which invest in other
funds of varying degrees.

CISs work on the principle of pooling resources, placing them in the hands of professional
management, and permitting investors to share benefits arising out of investment of those
funds. More specifically, CISs offer the following:

1. Aggregation of small savings into large pooled funds instead of individuals keeping their
small amounts of money because they are too small to be invested, many individuals
may invest same amounts and pool together a sizable fund. This large fund is
subsequently invested and benefits therefrom are distributed to investors in proportion
to what they have invested.
2. Professional management of the pooled funds. Placing fund in professional
management ensures that funds are managed by knowledgeable people for the interest
of investors. Professional managers are able to know where the investment
opportunities are available and what the risks are and how to take care of them.
3. Risk diversification and diversified portfolios. Professional managers are able to
construct an investment mix which alleviates risk on part of the investors. If an investor
invests in one kind of security and it does not perform, he is likely to suffer financial loss.
However, investing in several opportunities and therefore diversifying risk alleviates the
risk and possibility of substantial loss.
4. Lower transaction costs. An individual with a small amount of money pays more as
transaction costs in form of commissions and charges, than a professional manager who
has aggregated funds. For example, a manager who has aggregated Tshs. 100 million
has a better chance of negotiating favourable deposit rates than an individual with Tshs.
10,000.
5. Access to investments of higher minimum threshold. An individual with a disposable
sum of Tshs. 10,000 cannot participate in an investment opportunity where the
minimum investment requirement is for instance Tshs. 10 million. But, a manager who
has pooled funds from several such investors may do so.
6. Relatively higher return offer to investors. CISs offer returns to investors more
favourably as they enjoy certain fiscal incentives. E.g. Corporate Income Tax charged for
CISs is 10 percent as opposed to 30 percent for other bodies corporate.
7. Readily transferable and mortgageable securities. An investor in a CIS is entitled to a
security in form of a Unit or a Share, both of which are transferable. The Units or shares
may also be pledged as collateral for investors to access finance.

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Establishing a CIS

An application for approval to start a CIS is made to CMSA by the Manager or Trustee or
Custodian of the scheme.

The application must be accompanied by:

a. The scheme’s constitutive and offering documents.

b. The trustee/custodian’s latest audited report.
c. Custody agreement.
d. Management agreement.
e. Administration agreement.
f. Investment Advisory Agreement.

Scheme’s Constitutive Documents

The nature and content of these documents depends on the legal status of the CIS. For Unit
Trust, the constitutive document is the Trust Deed, while for an open ended investment
company it is the Memorandum and Articles of Association.

Contents of the Constitutive Documents

The 3rd schedule to the CMS (CIS) Regulations of 1997 sets out the contents. The following
matters must be disclosed:

a. Name of the scheme e.g. “Umoja Trust Fund”.

b. Participating parties-the manager, trustee/custodians, a lawyer and an auditor.
c. The following mandatory statements;
i. That the document is binding on all holders of shares and units.
ii. A declaration that holders are not liable for further payment after paying the
purchase price of the units or shares.
iii. A declaration that property of the scheme is held by the trustee in trust for the
holders of the units [this declaration is not appropriate for an OEIC] because
property there is held by custodian in trust for the OEIC and not for its
shareholders. This is because the existence of OEIC as a corporate legal entity
makes it difficult for the assets to be held in trust for the holders. The company is
not a trustee and the shareholders have neither direct nor indirect interests in
the assets of the company, save that they hold shares which entitle them to
require redemption payment which is made out of the property of the company.
d. Managers’ roles and their tenor.

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 e. Investment and borrowing restrictions of the CIS.
f. Valuation of property and pricing. The method of determining the value of assets must
be started i.e. selling/buying prices of shares/units must be set by specific formula
known from the beginning.
g. Suspension and deferral of dealing-when can these be allowed.
h. Fees and charges payable to all professionals.
i. The manner of holding unit or shareholders’ meetings.
j. Associated party transactions. Transactions between the scheme and the manager or
directors of the scheme or any of their connected persons, may in principle only be
made with prior written consent of the trustee or custodian.
k. Distribution date and date of annual income.
l. Annual accounting period of the scheme.
m. Base currency of the scheme.
n. Mode of modification/alteration of the constitutive documents.
o. Circumstances under which the scheme may be terminated.

Scheme’s Offer Documents

Information to be disclosed includes;

a. The constitution of the scheme, clearly setting out the following;

-Name of the scheme.
-Registered address and date of creation of the scheme with indication if duration is
limited.
b. Details of investment objectives and policy indicating summary of the investment and
borrowing restrictions.
c. Operators and Principals. The names and registered addresses of the Directors,
Trustee/Custodian, Investment Advisor, Tz representative in case of foreign owned
trust, Tz distribution company, auditors, registered or transfer agent and lawyers of the
scheme.
d. Characteristics of Units or Shares.
-Minimum investment, if any.
-Description of different types of Units or shares.
-Form of certification, frequency of valuation an dealing including dealing days.
e. Application and Redemption Procedures.
-Information in relation to newspapers in which prices will be published.
-Procedure for subscribing or redeeming Units, maximum interval between request of
redemption and start of redemption process.
-Circumstances in which dealing may be deferred or suspended.

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 -It must be stated that no money should be paid to any intermediary who is not a
licensed dealer or investment advisor.
f. Distribution policy and appropriate dates on which dividends will be paid.
g. Fees and charges payable by the investor including all charges levied on subscription,
redemption and conversion, also fees payable by the scheme including management
fees and start up expenses, as well as entitlement to brokerage or other transaction
benefits of any associated persons to the scheme.
h. Taxation. Disclosure of details of principal taxes levied on the scheme’s income and
capital including tax deducted on distribution to holders, if any.
i. Report of accounts.
-Date of scheme’s financial year.
-Particulars of what reports will be sent to registered holders and when. If there are
bearer units in issue, information shall be given on where reports can be obtained.
j. Warnings. The following statements shall be promptly displayed in the offer document;
i. “If you are in any doubt about contents of this offering document you should
consult your stock broker, bank manager, lawyer, accountant or other financial
advisor”.
ii. “The price of units or shares and income from them may go down as well as up”.
k. Documents open to inspection by the public. A list of constitutive documents and where
they can be found for inspection free of charge or by purchase.
l. The date of publication of the offering document and statement that the directors and
managers of the scheme accept responsibility for the information contained in the
offering document as being accurate as at the date of publication.
m. Termination of the scheme. Summary of circumstances under which the scheme may be
terminated.

TOPIC SIX

ISSUANCE OF ADDITIONAL SHARES BY LISTED COMPANIES

This is a process governed by CMS (Capitalization and Rights Issue) Regulations of 2002. These
regulations prohibit listed companies to issue additional capital by way of capitalization or
rights issue unless they have applied to the authority for approval of such issue.

The application to the authority shall state the following:

a. Full name of the applicant.

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 b. The exchange at which the applicant securities are listed.
c. The number of additional shares to be listed.
d. Effective date on which the additional shares shall qualify for admission for trading.
e. The full names of applicant’s directors and their business experience during the
preceding 5 years.
f. Purpose of issuance.
g. Designation of classes of shares, if any.
h. Nominal value of each share.
i. Number of shares authorized by the MEMARTS and number of shares issued already
and those to be issued under the application.
j. Where applicable, number of unissued shares of each class of securities reserved for
issuance for any purpose, and the purpose for which they are reserved.
k. A description of the rights attached to the shares with regard to voting, dividends,
liquidation proceeds, pre-emption in future capital increase and any other special
circumstances.
l. The date with effect from which additional shares will qualify for dividends, whether
such dividends will be paid in full, and the circumstances relating to limitation of time on
the right to dividend.

An application for approval shall be accompanied by:

a. A brief account of business experience in preceding 5 years of each number of

management of the applicant.
b. A statement concerning any important developments affecting the applicant or its
business since latest annual report of the applicant.
c. Where the applicant is being considered or has been considered for suspension or
delisting by the exchange, details of such consideration.
d. Where securities to be listed are in the hands of controlling shareholders, the latest
balance sheet together with profit and loss accounts of such holding
company/companies.
e. One copy of each contract, plan or agreement pursuant to which the securities applied
for are to be issued.
f. One copy of each letter of approval issued by relevant government authorities.
g. Resolutions passed by shareholders authorizing the issue of new shares.
h. The statement of the estimates of the costs involved in the application indication
brokerage expenses, approval fees, printing costs, advertising, professional fees and
other costs.

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 TOPIC SEVEN

CROSS-BORDER IPOs AND CROSS-LISTING

These are regulated by CMS (Foreign Company Offer Eligibility and Cross-Listing) Regulation,
2002. They apply to all offers of securities to be published in Tanzania of foreign companies
which have been incorporated in prescribed territories [Kenya, and Uganda], if a company is
not in one of these territories, it cannot raise capital in Tanzania.

Cross-listing refers to listing of securities of a company which is already listed in another

exchange. Examples of cross-listing companies include Kenya Airways, East African Breweries
and Jubilee Insurance (Holdings) Company.

Cross-border IPOs refers to the process of raising funds beyond the borders of the country
where the issuer is registered. Under Tanzanian law, only foreign Companies from prescribed
territories are eligible to issue securities to the public in Tanzania. These Companies must
comply with all the requirements of the CMS (Prospectus Requirements) Regulations, 1997.

Moreover, the issue proceeds cannot be exported.

An offer document by a foreign company is called an information memorandum. It is a

disclosure document.

A company from prescribed territory wishing to cross-list in Tanzania’s exchange must fulfil
the following requirements:

1. They must be listed in primary markets in their home countries.

2. They must be registered in Tanzania as foreign companies according to the Companies
Act.
3. They must establish a business office in Tanzania.
4. They must furnish authorities with special resolutions allowing them to cross-list in
Tanzanian markets.
5. They must furnish authorities in Tanzania with confidential report from their home
countries issued by the regulator and the exchange regarding compliance with home
regulations.
6. They must have a legal opinion prepared by a Tanzania lawyer.
7. They must pay cross-listing fees.

Why do Companies Cross-List?

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 1. To have access to broader investor base.
2. To increase the marketability of company’s securities.
3. Reducing the costs of equity capital for the issue.
4. Liquidity increase because of the trading hours.
5. Improvement of information flow of the Company. This is because the cross-listing
company is likely to strive to achieve international standards.

Key Obstacles of Cross-Listing facing E.A. Companies include:

1. Different foreign exchange regimes e.g. Tanzania allows 60 percent of shares to be in

public hands.
2. High cost of cross-listing. There is however a plan to share costs e.g. Listing in DSM and
Nairobi to charge jumbo fees to cover both exchanges.
3. Administrative bottlenecks. Caused by different regulatory authorities. There is also a
plan to have similar regulations for all stock exchanges so that if a company is listed in
one exchange, it should be eligible for listing in another.

—THE END—
Typed on the 23rd, 24th and 25th days of December 2008

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