Launched in 2013, the Enterprise Growth Market (EGM) serves a dual purpose. For the Dar es Salaam Stock Exchange (DSE), it acts as a useful feeder to the main board. Companies that cannot meet the listing requirements for the primary market are able to take advantage of the more lenient terms of the EGM, from which they may graduate to the main board after they have grown their capital base and generated a track record of financial results. For the general economy, the EGM provides an alternative source of funding for medium- and small-cap firms, which have traditionally been underserved by the banking sector. Micro-, small and medium-sized enterprises (MSMEs) account for around 95% of the country’s businesses, making them an important generator of jobs and economic growth. The development of this segment, however, has historically been constrained by a lack of access to finance, and MSMEs only contribute around one-third of GDP.
The exchange authorities have worked hard to establish the EGM as a useful fundraising platform, creating a listing framework that is considerably more lenient than that of the main market. The minimum issued and paid-up capital requirement, for example, is just TSh200m ($91,000), rather than TSh1bn ($455,000) on the main board; there is no requirement for three years of independently audited annual reports; only 10% of the issuer’s shares must be held by the public, rather than 25%; and the minimum number of shareholders is 100, as opposed to 1000. These and other advantages make the EGM a real alternative for medium- and small-cap companies looking to fund their expansions. Yet, as is common in similar boards across the continent, only a modest number of businesses have opted to list on the EGM thus far. By the end of 2017 six firms were established on the EGM: Yetu Microfinance Bank, Maendeleo Bank, Mkombozi Bank, Swala Oil and Gas, MUCOBA Bank and Mwalimu Commercial Bank.
Given the potentially important role played by the DSE’s new market, attracting new listings is a strategic priority for the exchange. Increasing awareness is central to this effort, as most smallcap markets suffer from an image problem. Operators must overcome this if they are to successfully develop.
The most damaging perception is that small-cap markets lack a stringent corporate governance framework, making them risky for investors. It has thus become standard that only investors with a high appetite for risk direct their capital to secondary boards such as the EGM, while income-generating investment should be directed solely to large-cap and blue chip institutions. A lack of financial data and metrics for most small-cap firms also means that expensive and time-consuming research is required to minimise risk. Exchange authorities have addressed potential risk by requiring firms listed on the EGM to appoint a nominated adviser, which is not required on the main board. The adviser helps EGM aspirants with the application process and oversees the financial operations of the company, thereby reducing the chance of failure. This system is important to help the DSE sell the EGM to investors.
There are numerous advantages of directing investment in small-cap markets. For example, the lack of analyst coverage means that investors who carry out the necessary research are well positioned to discover improperly priced stocks. Price discovery inefficiencies are much sought after by more sophisticated investors. Small-cap markets also offer investors the possibility of placing capital in a stock at an early stage of its growth trajectory. Growth rates in this segment can be significantly higher than those posted by large-cap companies; it is far easier for a small-cap enterprise to double in size over a given period than a blue-chip stock. The prospect of getting into a business on the ground floor can be a primary motivation. Creating momentum in a market for smaller firms, such as the EGM, can be challenging, but the potential rewards – for not only the exchange, but also the economy in general – make the effort worthwhile.