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Zambian Corporate Finance Options and the Securities (Commercial Paper) Guidelines 2020

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Ever since over 150 years ago when New York merchants began to sell their short-term obligations to free up capital to cover short term obligations, Commercial Paper has never lost its relevance in the competing corporate finance options.  Commercial Paper, which is really short-term unsecured promissory notes issued by companies, remains relevant even in Zambia for short term corporate financing obligations.

However, there has been lack of clarity of the acceptable parameters for issuing Commercial Paper in Zambia for a while, much to the chagrin of the capital market players.

At last, the Zambian capital markets regulator, the Securities and Exchange Commission (SEC) issued the Securities (Commercial Papers) Guidelines, 2020 on 24th July, to provide the much needed clarity on this short term financing option.

By legal definition, Commercial Paper in Zambia means a promissory note or security with a maturity of not less than 30 days and not more than 365 days.

The Guidelines augment the Securities (Registration of Securities) Rules, 1993 which are of general application to all securities.

The Guidelines are aimed at mitigating the risks associated with short term un-secured borrowing by corporates.

A company must satisfy an established eligibility criterion to issue a Commercial Paper which criteria inter alia includes profitability for a period of at least 3 years, paid up capital of K500,000 (US$28,000) and turnover of at least K5,000,000.00 ($280,000) per annum and maintain a debt to equity ratio of 4:1 inclusive of newly issued Commercial Paper. The Commercial Paper must have been prior

registered with SEC and procedure for issuance is clarified. The issuance limit must be set by the board of directors of the issuer.

The Guidelines permit the rolling over of Commercial Paper provided the rolled over period does not exceed 365 days and the consent of the investors has been obtained.

Any default of interest or principal payment on issued Commercial Paper by the issuer must be reported to a credit reporting agency by the share transfer agent of the transaction within 5 working days of default.

To ensure registration of Commercial Paper with SEC is not caught up in bureaucratic delays, which is not desirable in a short- term instrument, SEC is required to consider and approve applications for registration of Commercial Paper within 5 working days.

The guidelines close with a continuing monthly reporting obligations to the SEC by the Issuer in form of management accounts, credit worthiness data and outstanding balances of issued paper.

The guidelines will undoubtedly generate a renewed interest in Commercial Paper in Zambia. At a time when corporate finance options are limited, on account of downward economic activity arising from the effects of COVID 19, it should not be too long before the doors of SEC are knocked on, perhaps even too frequently, by corporates possessed with the spirit of New York merchants who first introduced Commercial Paper.

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Client Legal Alert – Equitas Legal Practitioners@2020*This scholarly article is a general guide and does not contain definitive legal advice. Readers considering taking action on any of the issues discussed should speak to their legal advisors before taking any such action. Equitas disclaims any liability whatsoever arising from acting on this article.

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Professional Bio

Mr. Lungisani Zulu

partner

Mr. Lungisani Zulu (Partner – Banking, Tax and Finance) is a highly experienced legal practitioner with expertise in banking, financial services regulation, tax, and corporatebfinance. He holds a Master of Laws (LLM) in International Commercial Law from Cornell University School of Law, New York and a Bachelor of Laws (LLB) from the University of Zambia (UNZA)

He is an Advocate of the High Court of Judicature for Zambia with rights of audience before the Court of Appeal, Constitutional Court, and Supreme Court of Zambia, and is also a Commissioner for Oaths and Notary Public.

Mr. Zulu has over 15 years of standing on the Roll of Legal Practitioners in Zambia and possesses extensive experience in financial services regulation, legislative drafting, and corporate and commercial law. Having previously served as Associate for Tembo Ngulube and Associates and as Senior Counsel for the Bank of Zambia, his core competencies include banking and finance transactions, regulatory compliance, policy formulation, legal drafting, contract negotiation, and dispute resolution.

He has significant expertise in advising on financial laws, regulatory frameworks, and capital markets, as well as in providing legal support in litigation and arbitration matters. His practice also encompasses corporate governance, board advisory, and complex commercial transactions.

Mr. Zulu server as President of the Law Association of Zambia (LAZ) and also serves as President of savannah Law Network and a member of the Chartered Institute of Arbitrators (UK) and the Institute of Directors of Zambia and sits on the boards of both public and private companies.

Professional Bio

Ms. Chiluba Mumba

managing partner

The Firm’s Managing Partner, Ms. Chiluba Mumba, is a highly accomplished legal practitioner with primary expertise in Energy, Mining, Infrastructure, and Corporate Advisory. She holds a Master of Laws (LLM) in Corporate and Commercial Law from the University of London and a Bachelor of Laws (LLB) from the University of Zambia (UNZA). She is an Advocate of the High Court of Judicature for Zambia with rights of audience before all Superior Courts.

Ms. Mumba has over 15 years of standing on the Roll of Legal Practitioners in Zambia and has extensive experience in corporate and commercial law. Her core competencies include corporate advisory, regulatory compliance, project structuring, contract negotiation, and risk management, particularly within the energy, mining, and infrastructure sectors.

Previously she served as Associate for various firms and as Director Legal for the Energy Regulation Board. Her work experience spans across the energy sector in particular, electricity, petroleum, and renewable energy, with a strong focus on regulatory frameworks, licensing processes, project development, and investment structuring. She also has experience in commercial and civil dispute resolution, as well as governance and board advisory matters within highly regulated industries.

Ms. Mumba is equally a member of the Law Association of Zambia (LAZ) and the Institute of Directors of Zambia. She also serves as the Southern Africa Regional Coordinator for the Africa Minigrid Developers Association (AMDA) and is an Associate Member of the Chartered Institute of Arbitrators.