MTN Uganda paid illegal “fees” to Capital Markets Authority to offer the public Shares

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It’s been long since my last article in The Legal Reports. But by now, we all know that on 11th October, 2021 MTN Uganda published its prospectus, where it confirmed its intention to float 20% of its shares to the public, 4,477,808,848 shares held in MTN by MTN International are on offer, to be exact.

By law this prospectus must be approved by the Capital Markets Authority under section 5 of the Capital Markets Act.

For a person like me, I went beyond the public information that MTN and Capital Markets Authority had given during their numerous launch events and press conferences.

I actually read the prospectus that gives details for the MTN public offer of shares. But like they say, the devil is always in the detail. This article won’t make a detailed fundamental analysis of the MTN Shares, I will stick to the legalese.

Even where I attempt to make a fundamental analysis, it shouldn’t be taken as investment advice.

I have issues with the way this initial public offering was structured. Instead of raising money to grow and expand its Ugandan operations, MTN Uganda chose to raise money to give to its selling shareholder MTN international Mauritius so that money is further taken out of Uganda, off shore to a tax haven.

MTN is in the area of technology and communications that’s ever evolving. Personally, I thought that MTN Uganda would focus more on raising money to do things like Research & Development and growth. Instead this MTN Initial public offering is going to facilitate the very illicit financial flows that have caused poverty in Uganda.

This just proves the point that these multi-national companies are here to extract wealth from us instead of growing us.

This MTN prospectus isn’t comprehensive enough. I was quite disappointed with the law firm S&L Advocates, former Sebalu and Lule advocates. Their legal opinion just wasn’t what one would expect from such a tier 1 law firm.

This is the first prospectus where financial metrics aren’t worked for the prospective investors. In more comprehensive prospectuses, normally a figure such as “Compound Annual Growth Rate (CAGR)” is worked out for the investor.

However, when I read the MTN prospectus, I had to work out the figure for myself. This was quite surprising, given the fact that MTN is marketing its Initial Public Offering as an opportunity to invest in a company that has high growth potential. I have my doubts on this.

The compounded annual growth rate (CAGR) is one of the ways to calculate and determine returns for anything that can rise or fall in value over time. Given the fact that the prospectus put the figures for revenue from operations and EBITDA (earnings before interest, taxes, depreciation, and amortization) over a period of 5 years, I wonder what was hard about working out the compounded annual growth rate for investors. Sadly, one has to work out this figure for himself, even the omuntu wa wansi.

Up until yesterday, I thought I was the only one making noise about the fact that this MTN IPO prospectus isn’t comprehensive enough. Thankfully, I was joined by Andrew Muhimbise, a retail investor at Uganda securities exchange, who among other things expressed concern about the source of the bonus shares MTN would offer, missing historical figures concerning the 2016 dividend payout, missing financial projections, among other things.

The letter was dully received by NSSF, Capital Markets Authority and Stanbic bank.

Hitherto, I expressed concern on my social media platforms about the MTN Uganda’s shareholding structure which I found opaque and very fishy, especially when it comes to the majority shareholder MTN international Mauritius. Let’s not forget that the proceeds from the IPO will go to MTN International Mauritius, whose beneficial owners weren’t disclosed in the prospectus.

This structure just hides the beneficial ownership principal of corporate law. I understand that MTN leverages the double taxation treaty Uganda has with Mauritius in order to minimize tax liabilities on distribution of dividends, declared profits and capital gains for shareholders. However, for good corporate governance, a prospective shareholder needs to know who the beneficial owners of these shares in MTN group are.

The way the shareholding was disclosed in the MTN prospectus is against the Capital Markets Authority regulations on corporate governance which provide for maximum transparency. This just reinforces the complaints some of us have had against Capital Markets Authority.

It’s one thing to hide the identity of the big beneficial owners of MTN shares in numerous shell companies in a tax haven before the tax man to limit tax liabilities, but to the prospective shareholders, this is a very important fact. You need to know who indeed calls the shorts in this company.

But despite the fact that that MTN prospectus has issues, I am more concerned about where Capital Markets Authority gets the legal mandate to charge MTN 1.3 billion shillings, in listing fees. It’s the reason I am writing this article. This is vital when trying to inquire into why MTN arrived at the price of 200 per share in the public offer.

According to the price to earnings ratio (P/E ratio) metric I worked out, this price is quite high, from an investor perspective. For investors to get listing gains ( the share price to go up) MTN must demonstrate an unprecedented degree of innovation which will make the share price trade above sh200, when MTN share are finally listed on 6th December, 2021 for trading on Uganda securities Exchange.

When I read the prospectus, on the part of use of proceeds, it unequivocally states that, “The funds raised from the Offer, net of related expenses payable by the Selling Shareholder, will accrue to the Selling Shareholder.” This indirectly implies that in arriving at the share price of 200 shillings, the expenses incurred in the listing form part of the reasoning that made the company value their shares at 200 shillings per share.

Therefore, the listing fees that MTN will pay to Capital Markets Authority are part of the expenses of the initial public offering that inflated the share price. So where does Capital Markets Authority get the mandate to charge these fees?

Personally, I think they are illegal and here is the reason. Section 101(1) of the Capital Markets Authority Act constrains regulations made by Capital Markets Authority to be established over activities permitted or required by the law.

There is no provision permitting or requiring fees to be created by CMA. It so happens that these fees Capital Markets Authority charged MTN Uganda were conveniently created by regulation 9 of the Capital Markets Authority (prospectus requirements) regulations.

Capital Markets Authority claims to derive powers to make these regulations to charge MTN Uganda 1.3 billion shillings under section 101 of the capital markets authority. I think this erroneous.

The law does not provide for regulated activities. It provides for regulated persons that CMA regulates. CMA doesn’t carry out regulated activities. Therefore, Capital Markets Authority is supposed to regulate fees set by regulated persons like brokers, authorized stock markets, and other market players.

The fees to be charged by CMA are stipulated in Section 24, Section 81 and Section 30. Anything beyond that is illegal. Therefore, MTN shouldn’t have incurred such an expense that’s responsible for inflating the price per share investors are being charged right now. I feel the MTN Uganda listing fees payable to capital markets Authority are illegal and should be challenged.

I am very sure the legal counsel for MTN’s IPO missed this. That’s one reason I opine that the law firm did a mediocre job. I am sure MTN Uganda officials, from a business perspective wouldn’t want to be seen fighting a regulator, after all, to MTN, 1 billion Shillings is nothing. They will happily pay that money.

Let me illustrate this further for more clarity. All the money collected from MTN offer of shares to the public will be the total proceeds from the IPO. Then, part of this money will be allocated to expenses incurred in the listing process like these Capital Markets Authority listing fees I am writing about, among other expenses and the balance to selling shareholder, who in this case is MTN International Mauritius. The sad reality is that the omuntu wa wansi who opened up an SCD account via the MTN MIPO platform doesn’t understand this.

Moving forward, I think the powers to approve offering documents like prospectuses for securities must be left to the regulated stock markets where the company chooses to list its shares, capital markets authority should only come in when a new asset class is going to be listed or offered to the public. This is what is done in Kenya and in most countries.

Capital markets Authority must only approve of the rules set by the stock market that govern a certain asset class, not going into the detail of approving prospectuses. They just don’t have this capacity. As we saw with the Tolea Exchange traded fund (ETF) prospectus, last year, where capital markets authority erroneously thought an ETF security is an asset backed security.

Capital Markets Authority made the issuer of this type of security waste time seeking judicial review of illegal assessments by the authority. The law must be amended to relieve CMA of all these powers. Capital Markets Authority should just focus on being a regulator of capital/financial markets, instead of being a commission agent in the Initial Public Offering process.

From an honest perspective capital markets Authority should come out and explain the 1.15 billion shillings they charged MTN Uganda as listing fees. While appearing before the Finance Committee of Parliament on certain Wednesday afternoon in May, 2021, the CEO of the Capital Markets Authority, Keith Kalyegira, told the committee members that the Capital Markets Authority expects to reap Non Tax Revenue of 1.15 billion Shillings from the listing of telecom giant MTN Uganda on the Uganda Securities Exchange. This money has no legal basis.

I would have said that MTN should claim the money on behalf of its investors, but even they wouldn’t be interested. The ordinary investor of course will carry this burden.

In my view MTN would have done a direct listing instead of going through an Initial public offering process, which is very expensive.

Capital Markets Authority should come up with direct listing regulations so that companies like MTN or Airtel can leverage the cheaper option of direct listings instead of an initial public offering that depends of intermediaries that increase the expenses for a company that wishes to go public.

With IPOs, the company uses the services of intermediaries called lead brokers (investment banks), who facilitate the IPO process and charge a commission for their work. In MTN’S IPO, the lead broker was SBG Securities, a subsidiary of stanbic bank.

The only problem associated with direct listings is that without an intermediary, however, there is no safety net ensuring the shares sell. The expenses involved in this MTN IPO are quite enormous. They even have a bearing on the high share price MTN is charging investors.

For example, on December 22, 2020, the Securities and Exchange Commission, that regulates stock markets in the United States, approved the New York Stock Exchange’s (NYSE) proposed new direct listing rules to allow companies engaging in a direct listing to raise capital directly through a primary sale of shares, in addition to, or instead of, only facilitating sales of shares by existing shareholders, as previously permitted.

Capital Markets Authority should think of exploring the feasibility of this idea in Uganda.
Under the NYSE’s proposal, a direct listing would let both the company and company insiders sell stock at listing, provided that the company sells at least $250 million worth of shares. There are no new lockup requirements, in that insiders can sell shares of the company as soon as it lists rather than wait up to 180 days to do so.

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