Investor protection in the capital market is the concern of every participant especially the investing members of the public. The capital market like the rest of the financial sector relies entirely on the confidence of the public on the issuers, the products they are offered and the intermediaries involved.
Issuers of securities are companies that raise capital from the public by offering shares or bonds (debt) directly to the public in exchange for cash. The usual practice is for the capital market regulators to put in place rules and regulations to guide issuers on how to raise capital directly from the public. The purpose of the rules and regulations is actually to protect investors against losses arising from actions of the issuers.
For issuers to offer securities to public and raise capital they must be legally constituted in accordance with the law. For public companies offering shares, their securities are required to be freely transferable while for issuers of debt some of whom may be private companies, the securities must also be freely transferable without any restrictions. Free transferability makes the securities truly public. In addition, they are required to disclose all information that a rational investor would require to make an investment decision.
The Capital Market Advisory Council (CMAC), like any other regulator or market operator, has developed market Rules and Regulations for the issuers, the intermediaries and the investing public in order to operate an organized, efficient and transparent capital market in Rwanda. These rules and regulations that govern the operations of the Rwanda over the counter (OTC) market are contained in the CMAC Blue Print.
The Blue Print contains Disclosure Requirements which guide and regulate the offer and sale of shares or bonds to the public. The purpose of the disclosure requirements is to ensure that the issuers provide enough information so that members of the public or investors can know and understand the company and assess whether they would be interested in investing their hard earned savings in the company. The disclosed information is contained in an information memorandum or a prospectus issued by the company. The contents of the prospectus are regulated.
At the minimum, the prospectus, which is the offer document, must disclose in detail the owners, directors and management of the company. It must also describe in detail the business operated by the company, the past trends, performance and management’s view of the future prospects of the business or the project. The company must also disclose the target amount of funds they are raising and the purpose for which they are raising the capital.
The offer document is also accompanied by signed personal declarations by all the directors of the issuer that the information contained in the prospectus is all the information that they are aware of about their business. This is an affirmation of the reliability of the information disclosed in the offer document.
The purpose of investing is to generate a return on the invested funds. The past financial performance and management of the business is a key component of the information disclosed by the issuer. The issuer is therefore required to disclose their audited financial and accounting reports.
To affirm the reliability of the published audited financial and accounting reports, the auditor must issue a letter of no objection to the issuer that the issuer can use the audited counts to issue securities and raise capital from the public. This ties the professional integrity of the auditor to the offer document and therefore some comfort to the public that the disclosed accounts have been prepared with due professional care.
The offer document or the prospectus of an issuer is prepared with help of a professional financial and or transaction advisors. The advisors also undertake and sign declarations that they have undertaken all the appropriate due diligence on the business and the project at hand.
In addition to the disclosure requirements at the time of offer, CMAC has listing rules and Continuous Listing Requirements. These requirements are put in place to ensure that as long as the issuer is listed on the capital market or throughout their listing life, they will maintain all the periodic disclosure demands placed upon them by the market.
Every offer of securities and subsequent listing on the capital market requires to be handled by a sponsor nominated by the issuer. The sponsor is required to be a member of the Rwanda OTC market who is thoroughly versed with the listing rules of the Rwanda OTC market. The sponsor is also required to sign a professional declaration to take the responsibility of ensuring that the issuer upon listing on the capital market shall adhere to the Continuing Listing requirements. The issuer is left to focus on their core business.
The professional sponsor is left to manage the day to day tasks of keeping the market informed on any periodic releases of corporate actions of the issuer like; periodic financial results, dividends, major deals announcements, through the capital market. This is another level of protection offered to investors in the capital market against any omissions or abuses by the issuers.
The first level protection of investors against issuers is anchored on the full and timely disclosure of information by the issuer. To this end, insider dealing is prohibited. Insider dealing refers to the use of material information that is not yet public to the benefit of those who are considered close or custodians of the information. These include directors, auditors and other parties associated with the company and would have access to information before the information is officially released to the public.
Robert Marthu is the
Capital Market Advisory Council