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CSMA Shares

The capital markets, just like other economic sectors have their specialists firms and individuals that specialize in organizing and implementing primary market issuances and facilitate the secondary market trade of securities. Some of the key specialists operating on capital markets are referred to as intermediaries. They are parties that facilitate transactions between issuers and investors on primary markets and between issuers and investors on secondary markets.

A stock exchange is a specialized market place where demand and supply for securities can meet easily to transact. In Tanzania, stock exchanges are authorized by CMSA. In order to be authorized, stock exchanges must have at least three licensed members (brokers/dealers). Currently, in Tanzania, there is only one stock exchange - the Dar es Salaam Stock Exchange (DSE); which was established 1996 and became operational in April 1998. The right to trade on a stock exchange is limited solely to members of that specific stock exchange. Such members (dealers and brokers) are referred to as Licensed Dealing Members (LDMs) of the exchange. DSE dealer and broker membership requirements are:-

  • The firm must have obtained CMSA's license to act as a Broker /Dealer;
  • A formal application for membership;
  • Payment of membership fees (admission and annual);

Worldwide, stock exchanges are "business clubs" that are Self-Regulated Organizations (SRO). An SRO is an institution which sets its own rules to govern the conduct of its members, who are required to comply with these rules. DSE has various members, including Licensed Dealing Members (brokers and dealers who conduct trade), institutional investors, listed companies, academic institutions, fund managers/investment advisors and professional bodies. These members appoint among themselves parties to sit on the DSE Council, the governing body of the exchange. CMSA, the market regulator, was vested with the power to appoint one person to represent public interest on the Council. The term for DSE Council membership is three years and members can serve for a maximum of two consecutive terms. The council appoints the top management of the exchange as well as setting up different rules to be observed by its members and by different users of services that are offered by DSE such as listing rules, trading rules, clearing and settlement rules, etc. Rules that are set by the DSE Council are binding on all members, thus DSE being an SRO.

An important group of capital markets intermediaries are brokers (also called stockbrokers). Brokers play roles on both primary and secondary capital markets. On the primary market they perform the following:-

  • Selling of securities to the public on behalf of issuers (selling & receiving agents).
  • Advising investors about issuances.
  • Providing investment advisory services to issuers.
  • Act as Sponsoring Brokers. The law requires issuers of securities to the public to appoint a sponsoring broker who is a Licensed Dealing Member of DSE. In the process of preparing an issuance, sponsoring brokers are the main link between the issuer on the one hand and CMSA and DSE on the other. Sponsoring brokers have to ensure that issuers fulfill the Regulator's (CMSA) and the Exchange's (the DSE Council) requirements for issuing and listing securities. They will also test the market to establish the demand for the securities being offered to ensure a successful issuance.

Brokers' roles to the secondary markets include the following functions:-o Acting as agents, they buy and sell securities on behalf of their clients at a commission.o Advisory services with or without a fee is a continuous service provided by all brokers on the market. Investors in securities, often, develop close relationships with their brokers.

Dealers undertake the same functions as brokers, but on top they may also trade on secondary markets as principals, that is, they may buy and sell securities on their own behalf; thus act as market makers on the secondary market. As market makers, dealers buy securities that they believe are underpriced and sell them when the price is right, thereby carrying a risk and making a profit from the differences between buying and selling prices. This function helps stabilize supply and demand on the market and decreases unwarranted excessive price movements. Dealers are also allowed to underwrite issues.
In Tanzania, currently all seven licensed brokers are also dealers. They are able to deal on both accounts (dual capacity - as agents and as market makers).
These are individuals who represent their respective companies. Brokerage or dealership firms need to be represented by a natural person who can execute transactions including placing of orders and putting up business strategies at company level. One of the requirements for any firm to be granted a license to operate as a broker/dealer is to have a person on full or part time basis licensed by the CMSA as an ADR. To be licensed as an ADR, an individual is required to attend a CMSA dealers' course conducted over three weeks, write and pass the examination at the end of the course. So far CMSA has administered such exams five times, in the years 1997, 1998, 2006, 2011 and 2013.

These are entities which provide financial advisory services, for a fee, to investors in various ways; as well as advising issuers wishing to go public and/or obtain listing at DSE. They also organize for placements of bonds, arrange for the underwriting of public offers and perform any other financial advisory service as required by the financial sector in general and capital markets in particular. Requirements to obtain a license are similar to that of brokers and dealers with two key exceptions:

  • Banks licensed by the Bank of Tanzania, by virtue of their responsibilities and roles in the market can be granted an Investment Advisors' license without meeting some of the conditions like having a person who has attended and passed the relevant CMSA course and exam.
  • Investment advisors also have authorized representatives, referred to as Authorized Investment Advisors' Representatives. The rationale behind their roles and functions, as well as their licensing requirements is similar to that of ADRs'.

The placing of orders on the DSE trading platform can also be done by another class of representatives called Floor Traders. Floor traders are individuals who are granted permission by the DSE to place orders on behalf of their companies even though they are not ADRs. The key requirement for Floor Traders is having attended a Floor Traders' Induction course and passed an examination, which is administered by DSE. DSE conducts the floor traders' induction course on regular basis and in accordance to the demand.
The Tanzania Stock Exchange Brokers Association (TSEBA) is an association established in 2001 by stock brokers / dealers for safeguarding their interests. It is an organization formed to develop the securities business while ensuring conformity with the law and regulations of the industry. TSEBA has three types of members namely ordinary (Licensed Dealing Members), associate (persons interested in securities business but they are neither LDMs nor ADRs) and honorary memberships (conferred by the Council of TSEBA to parties for their notable contribution to the industry).

Companies intending to issue/offer securities to the public must appoint a team of professionals to assist them in different capacities. They are basically responsible to lead the company through the issuance process and are referred to as issuance advisors which include the Lead Advisor, Sponsoring Broker, Reporting Accountant, Legal Advisor, Main Receiving Bank and Collecting Agents. In more specific terms they perform the following functions:-

  • Lead Advisor: is a firm appointed by issuers of securities to guide the entire issuance process including the preparation of issuance documents (e.g. prospectus / information memoranda), pricing the issuance and coordinating the other issuance advisors to the issuance.
  • Sponsoring broker: every public offer of securities has to be sponsored by a Licensed Dealing Member of the DSE. An issue can be sponsored singly or be co-sponsored. The main role of the sponsoring broker (leading sponsoring broker) is act as a link between the regulator (CMSA), the exchange (DSE) and the issuer. All communication to the regulator and the exchange regarding the issuance and listing are channeled through the sponsoring broker. Another role is to ensure that the issuer meets CMSA prospectus approval and DSE listing requirements and continuous listing obligations.
  • Reporting Accountant: is required to assist the issuer by looking at the way accounting data has been compiled in the issuance document, including assumptions and forecasts. The reporting accountant provides an independent evaluation of the company's financial reports. In order to ensure independence, the role of the reporting accountant cannot be performed by the company auditor. This segregation is in accordance with the National Board of Accountants and Auditors (NBAA) specifications and the International Financial Reporting Standards (IFRS).
  • Legal Advisors: the main responsibility is to guide the issuer to meet the issuance legal requirements in accordance to the CMS Act and Prospectus Requirements Regulations. They draft contracts with other service providers on behalf of the issuer, review the statutory requirements of the issuer and give legal opinion on the existence of the issuer, ownership of assets, liabilities and properties as well as reviewing any pending litigations of the company.
  • Receiving Bank / Collecting Agents: at issuance, issuers normally do not have the infrastructure and resources to handle the high volumes of applications and cash from the public. Thus, regulations require issuers to appoint a bank to act as a Main Receiving Bank. This bank has the overall responsibility of ensuring that all monies and forms collected by all receiving agents reach the bank according to the contract (Sales Level Agreement). The main bank coordinates all other receiving agents that may include other banks, brokers, dealers, Tanzania Post Corporation or any other organization appointed by the issuer for that purpose.
  • Depositories: Traditionally securities were held in a form of certificates (paper). Recent changes have displaced the share certificate with an electronic form for registering securities ownership.
  • Depositories Operations: A depository operates like a bank for securities. Ownership of securities is maintained in an electronic format to facilitate their authentication, transfer and delivery. This electronic format proved to be superior in terms of risk related to forgery and administration of securities to the earlier paper based system. DSE has installed a Central Depository System (CDS), an electronic record of securities as they change ownership. Beyond facilitating trade, CDS is also used to update the register of holders for the purpose of corporate actions such as administration of dividends. At this juncture is important to note the difference between CDS and CSD. The CSD mean the function within the DSE, or a subsidiary company of the DSE which holds the definitive and authentic record of securities in immobilized or dematerialized form, to enable book-entry transfer of securities. In other words the CSD is the operator of the CDS.
  • Depositories Bill: Currently, the depository facility for securities listed at the DSE (except government bonds) is within the exchange itself as a department (Clearing &Settlement Department). The Bank of Tanzania maintains a different depository facility for treasury bonds and bills. CMSA in collaboration with the Ministry of Finance has already drafted a bill to facilitate the establishment, operation and regulation of central depositories, to provide for the immobilization and eventual dematerialization of, and dealing in securities deposited in the United Republic of Tanzania, and for related matters. Immobilization is the process of retrieving securities certificates from holders for the purposes of keeping them in a depository. Dematerialization is the process of implementing a paperless system in which investors do not hold physical certificates but can obtain information about their holdings in statements (like a bank statement for money). The envisaged plan is to have an independent depository company that will carter for all institutions. The establishment of such a company is in line with the road map for regional integration and harmonization of rules. It is also envisaged that the creation of an independent depository company will increase efficiency in trading, delivery and settlement of securities not only in Tanzania but also in East Africa as each system will be carrying interface features to enable cross border transactions
  • Collective Investment Schemes: Collective Investment Schemes (CIS) refer to enterprises aimed at raising funds from the public for the purpose of investments (including on capital markets). The two main formats for such enterprises are Investment Companies and Unit Trusts.
  • Trustees/Custodians: Unit Trust custodians or trustees are responsible to keep under their control all assets of unit trust. The law in Tanzania requires a trustee/ custodian to be a bank licensed by the Bank of Tanzania to conduct banking business. The professional oversight provided by the trustee enhances financial market transactions in the sense that it reduces investors' worry about the way the fund manager invests the funds of the CIS.
  • Fund Managers: Fund Managers, both in the case of Unit Trusts and Investment Companies play a vital role in CISs since they are responsible for investing funds collected. A specific license is required for a firm to operate as a fund manager.
  • Underwriters: These institutions play an important role in direct financing. At issuance, they take risks by assuring issuers a guaranteed price for their securities. A wide range of financial institutions like dealers, Commercial Banks, Pensions Funds and Insurance Companies can underwrite. There are different forms of underwriting. Some of these are:-Nominated Advisors: - This new category of advisors which is particular to the Enterprise Growth Market (EGM) segment of the DSE. The role of the nominated advisor is to act as a full time consultant to start-ups, small and medium enterprises aiming at raising capital through the EGM. The nominated advisor is expected to guide the company from inception all the way until the company exits EGM. The nominated advisor acts also as the regulator's (and therefore the investing public's) eye and ears in the company. Licensing requirements are the same as those of the LDMs.
    • The underwriter buys the entire issue then resells the securities individually to investors.
    • The underwriter buys any securities not taken by the market at issuance; at a preferential price (e.g. TOL Limited shares were underwritten at a price of TZS 400 per share while the offer price was TZS 500 per share).
    • The underwriter takes unsold securities at market/offer price by charging a fee for committing funds (an example is the Offer for Sale of TCC shares in 2000, whereby some institutions committed such underwriting funds. Ultimately the offer was oversubscribed).