Corporate tax incentives will most likely boost stock market

The ongoing global financial crisis is likely to result in many becoming disillusioned with the whole concept of stock market participation and development. This disillusionment is likely to come about as a result of the persistent decline in share prices.

However, when one takes a closer look at what is taking place in these regional and international stock markets there may be a case to argue otherwise.

It is a fact that most of the 18 African countries that have stock exchanges have had their stock markets negatively impacted as a consequence of the current global financial crisis. However, a number of the same countries have been able to keep their heads above the water through this difficult time. One such country is Ghana. Ghana seems to have weathered this crisis quite well with its stock exchange exhibiting positive trends.

Given Ghana’s success one could argue that this therefore presents the case for development of formidable local economies around individual stock markets on the African continent.

If you took Uganda as an example one would have to commend recent developments at Bank of Uganda where new commercial banks have been allowed to register and participate in the country’s economy.

The telecommunications industry is another area worthy of recognition given that the number of participants within the sector has grown progressively over the years, thereby increasing mobile phone penetration across the country. The oil industry is also likely to deliver new income generation capabilities for the economy.

All these avenues of wealth generation present the challenge of developing mechanisms through which wealth generated can be shared. Taxation is one avenue through which such wealth can be shared because theoretically taxes are set so as to ensure that the general population can access better infrastructure; roads, hospitals and schools. The second avenue through which wealth can be shared within our economy is the stock exchange.

This avenue is yet to be effectively exploited in Uganda. Out of the country’s top 1,000 tax payers we have only six Ugandan-based companies listed on the Uganda Securities Exchange (USE) and four cross-listed companies from the Nairobi Stock Exchange (NSE). Ten listings compares very poorly with approximately 60 listings on the NSE and over 200 listings on the Nigerian Stock Exchange.

Evidently, that means that the country’s corporate wealth is concentrated in a few hands. We often hear the argument that the poor are getting poorer while the rich are getting richer. One way to deal with such arguments which do not auger well for the development of patriotism and the establishment of a spirit of nationalism is to ensure that the stock exchange is better understood and exploited for the well-being of the local population.

The Capital Markets Authority (CMA) along with industry players needs to commence a massive education drive to demystify the perception that the stock exchange is a rich mans’ “club”, where company ownership is exchanged between “friends” and wealthy families. The man on the street needs to understand that they are all welcome to the party.

Further to this, successes of companies such as Uganda Clays and New Vision Printing and Publishing Corporation which have raised formidable capital from the exchange through recent rights issues — where they issued additional shares to existing shareholders — need to be shared. This would give sceptics a better understanding that it is actually cheaper to raise money on a stock exchange than it is to obtain funds from a commercial bank, microfinance institution or a money lender.

The task here is for the CMA to demonstrate that involvement in the stock exchange can actually be a cost effective venture. The number one perk to stock market participation however seems to be tax concessions. The government needs to ensure that there is an incentive to stock market participation.

In many African countries this incentive is derived from the fact that a company’s participation on the stock exchange results in that company paying a reduced percentage towards corporate tax. The argument here is that in participating on the stock exchange a company is already sharing its wealth. The logic being that wealth its generating is already flowing into the local economy through its profit sharing dividend arrangements and stock trades on the local bourse.

This inherently results in enhanced goodwill from the local population because once a company is listed on the stock exchange it stops being perceived as “their” company and it subsequently becomes “our” company.

This is definitely a cue that government needs to take seriously because recent studies have indicated that up to 80 per cent of Uganda’s top tax payers are prepared to list on the Uganda Securities Exchange if their listing resulted in reduced corporate tax.

Credit: Martin Ongom Owiny

Source: Sunday Monitor