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Ethiopia: Shareholders Under Fire


Four years ago, Mihiret Geremew used to work as a janitor with Ethiopian Airlines for a monthly salary of 600 Br. In search of a better livelihood, however, she gave that job up and trained to become a barber. She now works at Selam men’s barbershop around Hayahulet. While working there she wanted to use her limited savings to make some more money.

“One of my clients told me that buying shares would be profitable,” she recalls. She did not waste any time. In 2009, she bought five shares in Sheger City Meter Taxi S.C. This was one of the companies under formation at the time, through the initial public offering of shares, each for 1,000 Br. Established in 2008, Sheger City Meter Taxi continued to sell shares until recently.

The share company, which has a seven-member board, floated the public sale of shares with a par value of 1,000 Br, with a nine percent premium. This was done in order to expand its capital base to 50 million Br. Although the sale of shares started on October 16, 2008, the promoters of the company failed to live up to the promises given to shareholders like Mihiret until now.

“I thought that was the right moment to be a part of a company with great potential,” Mihiret told Fortune. However, four years would follow after that and the benefits she hoped to gain were still far away. Since 2009, the year Mihiret bought her five shares, the country has seen an unprecedented growth in the number of share companies under formation through the initial public offer of shares.

Close to 17 share companies were established in the 2008/09 fiscal year. This was a radical increase from the figure registered after the formation of share companies was resumed during the military regime’s final years. Although the rate of company formation has improved subsequently, it was the number of private limited companies that increased at an accelerated rate, as opposed to that of share companies.

Most of the share companies formed during this period often had only around five members. It was only since roughly 2005/06 that share companies started selling shares to the wider public, thereby creating a larger shareholder base. By the 2011/12 fiscal year, 37 share companies were formed through the initial public offer of shares.

Although a few share companies managed to mobilise large amounts of capital from the public, the failure of most of the share companies also brought disappointments to Mihiret and several thousands of other shareholders. “I have not ever gone to ask anyone there. The only thing I did was to call them, but this was unsuccessful,” Mihiret claims.

For both Mihiret, who bought a share with little knowhow about what a share company is all about, and Mekuria Degu, a shareholder at the Access Real Estate S.C, who was also recently elected as a board chairman of the company, the idea of buying additional shares in another company with a similar mandate seems to be unthinkable.

“I know very well that I can make as a good a profit individually as I can make within a share company if I choose properly,” says Mekuria. On the contrary, Mihiret, vows not to buy the shares of any company anymore. “Whatever amount of money I may have, I will never buy a share from any company. I will instead deposit it at a bank, if I have nothing to invest in,” she strongly speaks.

However, most of the promoters argue that the absence of shareholders during important meetings is the cause of the problem.

The shareholders show negligence in appearing at general assemblies to hear audit reports. On the contrary, they only interfere in matters that do not need their interference, according to Minalachew Simachew, the acting board director of Hibir Sugar S.C – one of those share companies where disputes have been inevitable.

“Only 800 shareholders out of the total were there when we had to sign at the Documents Authentication & Registration Office (DARO),” Minalachew claims. “Those shareholders want to work the jobs of the board and management, which resulted from their mistrust over the existing board.” Hibir Sugar S.C currently has 4,687 shareholders.

The view of Minalachew seems to be well supported by both the DARO & the Ministry of Trade (MoT). “I remember when the board of directors of the Hibir sugar S.C faced a problem to authenticate their signature. Only a few of the shareholders were present,” Tenaw Alemayehu, Documents Authentication & Registration director, told Fortune.

Although the board of directors called for a general assembly on August 03, 2013, it couldn’t meet due to the fact that the minimum 25pc of shareholders couldn’t appear. The emergence of the share companies is seasonal according to Tenaw. “I once remember when the man who collected money from shareholders went to South Africa. Our office was really crowded just to represent a legal lawyer,” Tenaw recalls.

“Whenever a number of shareholders comes to us, we understand that this enables us to make a larger amount of money in a shorter period of time,” Abiy WeldeGebriel, Public Relations officer with DARO, says. Shareholders from four share companies brought their complaints about the management dispute to the MoT. Two of them have presented their cases to court during the last fiscal year, according to Deressa Kotu, director of Business Registration & Licensing with the MoT.

Shareholders, like Mekuria and Mihiret, accuse the promoters for their lack of transparency, which ultimately leads to the downfall of the companies. “The sector is highly prone to non- transparency. Individuals and groups do whatever they want to do with money that belongs to the public and shareholders,” Mekuria claims. Like that of Mekuria from Access, shareholders in Sheger City Meter Taxi and Hibir Sugar have been complaining over the actions taken non-transparently in the companies, including financial expenses.

For an economics lecturer at Addis Abeba University (AAU), who has published a couple of researches on the issue, the problem that exists between the promoters and shareholders arises as the result of lack of a legal framework to govern the contract between the two. “If shareholders have developed mistrust, it is not because they have the habit of not trusting others. It is rather because they faced situations that forced them not to trust others for the second time,” he suggests.

To create trust among stakeholders, according to the expert, formulating a legal framework is vital. Since February 2012, a draft is in the making, aiming at regulating the functions and accountabilities of share companies. It was drafted inspired by laws governing share companies in the United Kingdom, Malaysia, and India, which follow the common law legal system.

The bill also requires a share company to have 50,000 Br in establishment capital and a minimum of five shareholders who have to pay at least 10 Br for the par value of a share. Promoters are also required to conduct full disclosure to shareholders on any sort of conflict of interests that may harm the interests of the company. Founding members who have made intellectual and contributions in kind will be required to present valuation of their contributions to the MoT and regional trade bureaus for verification by independent valuators.

Although the bill was initiated to protect the rights of shareholders, as there was no regulatory oversight to protect them from losses, because of its prolonged ratification shareholders are still prone to risks, according to the expert.

The bill contained penalty clauses, including a 20,000 Br fine on promoters who make misleading statements in their prospectuses and withhold relevant information. This is on top of criminal liabilities the country’s criminal code imposes, according to the bill. Valuators who may be found issuing inaccurate values to contributions will be subjected to a fine of 15,000 Br, according to the bill. However, government institutions, like the National Bank of Ethiopia (NBE), according to the expert, are taking steps to protect individuals who bought shares in the financial institutions.

The 2008 proclamation, which regulates banking business, prohibits any person other than the government from holding more than five percent of the shares in a bank. The proclamation also defines a shareholder who owns two percent or more of the shares as an influential shareholder.

As far as share companies engaged in banking business are concerned, there seems to be a governmental policy against block holding, said the expert. “However, there is a movement, especially in the financial sector, and it should be repeated in other,” he added. The share companies come to the MoT mostly due to their own internal problems. These include mistrust among the shareholders and board members according to Deressa. Yet, Derssa admits the gaps in the regulatory body.

“We cannot say we give complete protection,” he said. So far, the sector has no specific regulatory law that can control and supervises it. The only law that is applied to regulate the sector is the sub articles mentioned under a chapter in the commercial code of Ethiopia. This was enacted as of 1960 during the emperor Haile-Sellassie’s regime. This is in addition to the registration and licensing proclamation ratified in 2010.

“Of course, the current regulations do not thoroughly address the challenges in the sector, given that the sector is emerging,” says Deressa .

To this effect, the MoT is drafting a new directive to be implemented “in the near future”, which will address the challenges, according to Deressa. Until the government finalises the preparation of the legal framework, Mekuria, prefers to buy additional shares in the already established financial institutions. On the other hand, Mihiret decides to open her own barber and not to buy a share from any other company ever “I don’t want to be deceived twice”, Mihiret affirms.

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