Promoting Local Equity Participation through the Capital Markets

Wealth creation through the capital markets is a well-established practice in developed economies, where investing in stocks is considered one of the more reliable paths to financial growth. However, locally, the options have been more limited, and the capital markets remain underutilized as a tool for building wealth. That is however beginning to change.

Stimulating local participation in Ghana, particularly in sectors that have been driven by foreign direct investment, was done through legislation requiring local equity participation. In the upstream petroleum sector, 5% equity participation by an indigenous Ghanaian company is required to enter into a petroleum agreement or obtain a license. Similarly, foreign companies in this sector must form joint ventures with Ghanaian companies, with the latter holding at least 10% equity. In downstream activities, this percentage increases to between 50% and 100%, depending on the license category. The power sector requires a minimum of 30% equity participation from Ghanaians, with this share rising to 51% after 10 years of operation. Similarly, the renewable energy sector mandates 15% local equity, which must increase to 51% within the first decade of business.

This policy extends beyond energy and natural resources, in the fintech and telecommunications sectors, there are also significant local ownership requirements ranging from 30% to 70%.

The mining sector has introduced a novel approach by requiring a mandatory listing requirement. Mining companies which have been operating in Ghana for more than five years, with a capital expenditure of at least USD 100 million, must now list a minimum of 20% of their equity on the Ghana Stock Exchange (GSE). This requirement presents new opportunities for local investors to participate in spaces that were previously dominated by foreign capital.

Admittedly due to the challenges posed by the recent domestic debt exchange program, inflationary pressures, and high interest rates, this may not feel like the best time. We were however admonished not to waste the crisis at the Promoting Local Equity Participation through the Capital Markets programme. Truthfully, the best time to build is often when fire has razed all structures to the ground. ?

One main idea workshopped during the programme was the creation of Special Purpose Vehicles (SPVs) to acquire shares from companies with local equity requirements. These SPVs could offer diversified investment opportunities across different sectors and list on the GSE, providing local investors, including pension funds, with a way to diversify their portfolios while also meeting the growing demand for local equity participation. Alternatively, existing SPVs such as Ghana Amalgamated Trust could be expanded for such ventures.

Further, I feel this presents a unique opportunity for Ghanaians living abroad or diasporans who those who have returned and are looking for passive ways to invest in Ghana. More accessible and increased local participation, I also –perhaps naively – believe, will improve the governance of listed businesses. I believe that as more local investors hold stakes in these businesses, the level of interest in and scrutiny around corporate governance will rise, driving transparency, accountability, and ultimately, better performance. In the long run, this will strengthen our capital markets, increase the number of sophisticated investors, and contribute to the overall growth of the economy. While the macro economic challenges remain, I believe that this is a step in the right direction.

What are your thoughts?

#LocalEquityParticipation #WealthCreationGhana

#InvestInGhana #CapitalMarketsGrowth

#Governance #Transparency