INTRODUCTION TO THE LUSAKA STOCK EXCHANGE (LuSE)

Background to LuSE

The Lusaka Stock Exchange (LuSE) was established with preparatory technical assistance from the International Finance Corporation (IFC) and the World Bank in 1993. The Exchange opened on 21st February 1994. In their first two years of operation, the LuSE and Securities and Exchange Commission (SEC) are funded by the UNDP and Government of Zambia as a project on financial and capital market development in Zambia under the multi component private sector development programme.The LuSE is made up of stockbroking corporate members and is incorporated as a non - profit limited liability company. Currently, there are six members of the exchange. Three firms handle the bulk of the trades, but by value of the trades Pangaea Securities Zambia handles by far the bulk of the transactions.

Role

The formation of the Exchange is part of the government's economic reform programme aimed at developing the financial and capital market in order to support and enhance private sector initiative. The Lusaka Stock Exchange is also expected to attract foreign portfolio investment through recognition of Zambia and the region as an emerging capital market with potentially high investment returns. Another important role of the Exchange is to facilitate the divestiture of Government ownership in parastatals and realisation of the objectives of creating a broad and wide shareholding ownership by the citizenry via a fair and transparent process.

Modern Stock Exchange

With the above in mind, the Lusaka Stock Exchange has been set up as a modern stock exchange based on the most current international standards and practices. These include, for example, the following:

• Use of a central share depository system
• Trade-for-trade netting clearing and settlement process
• Rolling settlement 3 days after the trade (T+3)
• Meets G30 recommendations for clearing and settlements system design and operation.

Strong Investor Protection Legislation and Centralised Market

The rules and listing requirements of the LuSE are backed up by supporting legislation enacted as the Securities Act No 38 of 1993. The Securities Act regulates the entire Zambian securities market and is specifically designed to ensure adequate investor protection and support the operation of a free, orderly, fair, secure and properly informed securities market. The Act creates and defines a central market in which both unlisted and listed securities trade on exchange as opposed to the dual market system.

The Role of the Securities and Exchange Commission ( SEC - Zambia)

The Securities Act, establishes the Securities and Exchange Commission (SEC) as a corporate body. The SEC is given powers under the Act to regulate and supervise the securities industry in Zambia. The regulatory powers of the Commission have four major requirements:

1. That any person dealing or advising on securities must be licenced by the SEC;
2. That any securities market must be licensed as a securities exchange by the SEC;
3. That all securities of a public company which are publicly traded must be registered by the SEC; and
4. That collective investment schemes must be authorised by the Commission.

A Compensation Fund is established under the Act and is designed to compensate persons who suffer a pecuniary loss occassioned by default of a licensed dealer or licensed investment advisor.
The compensation Fund is a mechanism aimed at creating investor confidence in case of default by the dealer or investment advisers, which otherwise would lead to investors losing confidence in the securities industry in Zambia.

Fiscal Investment Incentives

Several incentives have been put in place to promote rapid development of the capital market in Zambia. These include the following:

No exchange controls
No restrictions on shareholding levels
No restrictions on foreign ownership
No capital gains tax
Corporate income tax reduced to 30% for companies listed on the LuSE.
No property transfer tax on listed securities

DESIGN AND STRUCTURE OF THE SECURITIES MARKET

Publicly Traded Securities

The Securities Act No 38 of 1993 defines publicly traded Securities as those of a public company that has more than 50 shareholders or those that the SEC has by notice declared to be publicly traded.

Under the Act, all such companies are required to, register their securities with the Securities and Exchange Commission (SEC) and are required to submit annual reports and accounts to the Commission. They are also obliged to report to the SEC any facts concerning the company which may affect the value of the shares.

Central market system ("unified market")

The Zambian securities market has been designed as a "unified market" where virtually all trading is conducted through a stock exchange.

This is in contrast to the "dual market" system in which only selected stocks are listed and traded on exchange (sometimes referred to as the organised exchange or exchange market ) - and the balance traded off exchange as unlisted stocks (usually referred to as traded over - the - counter or OTC and sometimes called a decentralised market).

The central market design of the Zambia market means that securities of public companies that are not listed are also quoted and traded on a second tier market within the Lusaka Stock Exchange.

Advantages of a central market

There are several advantages to the "unified market" system.

1. It channels all trading activity through one market. This enhances liquidity and market depth.
   Liquidity is the ability to buy or sell both quickly and without substantially moving prices. Market depth refers to the ability to transact at the current market price and is particularly important when large volumes are involved. Both liquidity and market depth ultimately dictate the success or failure of a market.
   Thus centralising the market is an effective method that attempts to compensate for the low volumes and thin trading activity so typical of infant and start up stock markets. A central market creates the necessary critical mass to enhance market liquidity.
2. It avoids duplication and makes more efficient use of natural resources.
3. It gives maximum transparency in securities dealing and this reduces the opportunity for malpractice and improves the reliability of pricing.

Price Discovery

The advantages of the centralised structure of the stock market in Zambia are borne out by the empirical evidence to date on the price formation of shares on the LuSE.

The stock price movement charts show a general characteristic pattern of initially high market entry pricing followed by large significant drops in prices with increased trading activity and over time gradually leveling off to stable price movements. This pattern is particularly noticeable for example, in the price movement charts for Chilanga Cement, Rothmans and Standard Bank.

The logical explanation for the initial downward trend in prices is that this represents the price discovery process of the market at work. Price discovery is being driven by the formalisation of the market, namely a central market, regulation requirements, disclosure of company information and the interplay of demand and supply. The netresult is market transparency which in turn improves market efficiency and price formation.

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