Equity Finance 2024 Comparisons

The early stage of the typical financing arrangement, and venture capital financing, is through the issue of shares in companies. Venture capital investors typically negotiate acquisition of preference shares with preferential economic rights.

Convertible forms of financing are common especially at the venture capital financing stage where the valuation of the companies is difficult to determine. The conversion often includes a discount or a valuation cap to reward early investors for their risk.

Growth financing involves debt finance, mezzanine finance or equity investment (typically minority stakes). The type of financing arrangement available will depend on the nature of the business.

Private equity financing involves acquiring significant stakes in the target. The investor will take an active part in the management of the company with the view to grow the value of the company and with an exit strategy typically within a period of 4–7 years.

Mezzanine financing is more common in growth financing as opposed to early stage financing where companies are mature and seek financing before a larger equity round or exit event. It is particularly useful when the company needs capital but does not want to (or is unable to due to previous financing conditions) give up significant equity thereby allowing the founders to retain control. Mezzanine financing is often used as bridge financing when the company is preparing for an initial public offering or another major liquidity event.

The Stock Exchange of Mauritius (SEM) has two platforms for equity listing, namely the Official Market and the Development & Enterprise Market (DEM). The Official Market is the primary market for trading equities, debt instruments and other securities in Mauritius. The DEM is a specialised segment which supports the growth of small and medium-sized enterprises and companies with high growth potential.

The fundamental steps for the listing process are similar for the Official Market and the DEM. The key differences lie in the eligibility criteria, the admission fees, regulatory requirements and ongoing obligations.

The eligibility criteria to be admitted to list on the Official Market include that at least 25% of the company’s shares should be listed, at least 200 shareholders should be subscribed at the time of listing and the company should have a track record of at least three years. For the DEM Market, the eligibility criteria include that at least 10% of the company’s shares should be listed, at least 100 shareholders should be subscribed at the time of listing and a set of audited financial statements for at least one year is required at the time of the application.

The process of equity listing can be summarised as follows.

1. Preparation:

• Initial meetings – the issuer conducts preliminary meetings with the SEM and the Financial Services Commission (FSC) to discuss the listing requirements.
• Appointment of advisers – the issuer appoints a team of advisers, including underwriters, stockbrokers, corporate advisers, accountants, lawyers and other experts.
• Document preparation – the issuer, in collaboration with its advisers, prepares the listing particulars and other application documents.

2. Application for listing:

• Initial submission – the initial application documents are submitted, together with the listing particulars, to the SEM. The listing division of the SEM reviews these documents and provides feedback within ten business days.
• Revisions – based on the SEM’s comments, the issuer makes the necessary revisions and resubmits the updated documents.
• Final submission – once revisions are complete, the final application documents are submitted to the Listing Executive Committee (LEC) at least three business days before the committee’s meeting. The LEC then grants approval for the listing.
• Approval and listing – after receiving LEC approval, the issuer can proceed with listing on the SEM after a minimum of ten business days.

3. Marketing and book-building:

• Roadshows – the company conducts roadshows to attract potential investors.
• Book-building – based on investor feedback, the price is finalised, and orders are collected during the book-building process.

4. Admission to listing:

• If capital raising is successful and all conditions are met, the company is admitted to listing on the agreed business day.
• Share deposit – necessary arrangements are made to deposit share certificates with the Central Depository & Settlement Co. Ltd.

5. Post-listing:

• Ongoing compliance – once listed, the company must comply with the continuing obligations of the Official Market’s Listing Rules or the DEM Rules, as applicable. This includes regular reporting, adherence to corporate governance standards, and maintaining transparency with investors.

In 2021, Mauritius welcomed a new listing platform, Afrinex Limited, an international securities exchange with a view to offering a multi-currency and multi-asset exchange operating equity, fixed income and derivatives. It aims to serve as a pan-African platform for listing and trading a variety of financial instruments.

The market in Mauritius is made up of two segments:

• local companies; and
• companies operating in the global business sector whereby companies in Mauritius are used as a platform for investments in other jurisdictions.

Debt-to-equity swaps, down rounds, and capital increases with dilution of existing shareholders are all equity restructuring techniques to adjust for financial difficulties.

Down rounds can significantly dilute the existing shareholders and are generally viewed as a negative signal that the company has poor prospects and/or may have been previously overvalued. In addition, investors in a down round would generally require additional favourable terms which in turn can hinder future financing rounds. Where possible, down rounds tend to be avoided.

Local Companies

Debt-to-equity swaps tend to be less common due to the nature of the debt providers who do not wish to be equity holders.

Global Business Companies

In the global business sector, debt-to-equity swaps are seen, although not that often. Capital increases with dilution of existing shareholders is a more common technique in both segments.

The management of a company is carried out by a board made up by the appointed directors of the company. The law through the Mauritius Companies Act 2001 provides for the protection of equity investors through shareholder rights given to investors. While some of those rights can be amended or varied by agreement between the equity holders, others are mandatory and cannot be waived. Decisions such as adopting, amending or revoking the constitution, reducing the stated capital of the company, approving an amalgamation of the company or putting the company in voluntary liquidation are decisions that require shareholders’ approval and cannot be derogated from.

Further, shareholders are given certain information rights such as the right to inspect and request copies (on payment of a fee) of particular information relating to the company including minutes of all shareholder meetings and shareholders’ resolutions and copies of written communications sent to all shareholders or specific classes of shareholders within the past seven years, including annual reports, financial statements, and group financial statements.

Shares are, by default, transferable unless there are restrictions set out pursuant to the terms of the issue and/or as set out in the company’s constitution.

Exit rights are typically agreed contractually and will be set out in the shareholders’ agreement and/or the company’s constitution.

In addition, the shareholders’ agreement and/or the company’s constitution would provide other matters such as the rights of different share classes, information rights, pre-emption rights, and other matters requiring approval of shareholders.

Typically, investors do not provide both equity and debt to the same company. There have been instances where banks, as part of restructuring, have converted part of their debt into equity to allow the restructured enterprise a chance of survival.

In terms of local companies, institutions like the Mauritius Investment Corporation and the National Pension Fund provide both equity and debt in the form of debentures. The advantage of having an institution providing both, though not a common occurrence, provides for an alignment of risk between debt providers and equity providers and reduces the risk of foreclosure.

There are institutions which are providing preference shares and depending on its features as per the International Financial Reporting Standards (IFRS) can be classified as either debt or quasi-equity.

The common features and techniques in equity finance in Mauritius are as follows.

• Share issuance – ordinary/preference shares, and rights issues.
• Convertible instruments – issuance of convertible bonds/debentures.
• Hybrid forms of financing such as mezzanine financing – not that common with local companies.
• IPOs – well established with several major local groups listed on the exchange.

The source of equity financing depends on the stage of financing. Early stage financing is raised through investments by the founders, family and friends and sometimes through grants (governmental and/or institutional) while venture capital financing tends to come from angel investors and venture capital firms. Venture capital financing is from high-net-worth individuals and institutional clients and increasingly PE firms and development finance institutions branching out to support venture financing.

Private equity financing is mainly sourced from private equity investment funds. Mauritius, being a hub for investments in Africa, houses a significant number of the private equity funds geared towards Africa.

Except in certain limited sectors, such as television broadcasting, sugar, and tourism, there are no restrictions on foreign investment in Mauritius.

Local Companies

Debt finance, whether through loans or bonds, is a much-preferred route than traditional equity markets. This is irrespective of the size, age, shareholder composition or industry. In a market like Mauritius, like most emerging economies, cost of debt is cheaper than equity. The debt capital markets space in Mauritius has developed significantly in sophistication, complexity and volume over the years.

The Financial Services Commission also issued a set of regulations on green bonds in 2021/2022 which more and more companies are abiding by. This is a much-encouraged move as companies seek to raise more sustainable finance. There has also been an emergence of crowd financing platforms which offer a quicker – albeit more expensive – route for SMEs.

Global Business Companies

The trend is different compared to local companies with equity finance being predominant with investments geared towards Africa and India. With rising interest rates in Africa, companies have shied away from local banks in mainland Africa and have turned to private equity funds. As previously mentioned, Mauritius is the domicile of a large majority of all private equity funds investing in Africa. Private equity funds (“PE funds”) have also started providing unsecured credit because the risk profile on the continent has deteriorated and international banks do not have a relevant appetite. Consequently, there has been a rise in debt funds in order to plug the gap.

With regards to local companies, the sources of information on equity finance deals are quite fragmented and incomplete apart from those publicised on the stock exchange or where private deals are announced. Deals publicised on the stock exchange are under an obligation to disclose the amount of the transaction while private deals do not have such an obligation. The authors do not expect the equity finance market with respect to local companies to grow significantly in 2025.

With regards to global business companies, the trend is expected to be more towards private equity funding in 2025 while interest rates are expected to take some time to return to “normal” levels.

Local Companies

There are a growing number of family holding entities acting as PE funds for investment in private companies. Angel investors are also growing in popularity. There have been very few IPOs lately, with one in the telecommunications sector this year and one last year in the logistics sector.

Global Business Companies

The private allocated equity market and the public-raised equity are both well developed markets in Mauritius, however, private equity deals have a greater share in terms of the volume of deals compared to public equity. As mentioned, there has also been an emergence of private equity debt funds which are providing credit.

Local Companies

The country benefits from a well-established and sophisticated adviser scene including accounting firms and boutique advisory firms. Corporate finance advisory is still a new profession in Mauritius as it has been regulated by the Financial Services Commission for less than ten years. Deals sourced through corporate finance advisers are growing.

Global Business Companies

International advisers are frequently retained to drive the larger ticket fundraising.

An investor may realise its value through a secondary sale, a trade sale or an IPO. Secondary sales and trade sales are the more common exit paths.

The factors driving the decision of a company on whether to take on equity or debt includes the availability and cost of debt, how leveraged the company already is, whether existing shareholders are willing to be diluted and whether the company is ready to onboard equity investors who may wish to exercise a level of control on the company.

An investor’s decision on whether to provide equity or debt includes the stage the company is in, what security the company could/is willing to provide, the level and type of return an investor expects to achieve (whether income or capital) and the risk appetite of the investor (equity is higher risk but higher return).

Local Companies

In Mauritius, debt finance is more important to companies. Local companies generally tend to favour debt as most of the companies are owned by families who wish to retain control of the company.

Global Business Companies

For global business companies, both equity finance and debt finance are important and whether a company wishes to take on equity or debt finance depends on a variety of factors, a few of which have been detailed in this chapter.

The time required to raise equity finance depends on various factors including the outcome of due diligence of the company, how well records have been kept and also whether any regulatory approvals may be needed (such as the Bank of Mauritius, Financial Services Commission, and Competition Commission).

It is difficult to specify timeframes for equity raising as it depends on a variety of factors including the amount being raised, age of company, sector of activity and of course the state of the market and economy including macro-economic factors.

As mentioned, except for certain limited sectors such as television broadcasting, sugar, and tourism, there are no restrictions on foreign investment in Mauritius.

Subject to the company satisfying solvency requirements, there are no limitations on investors paying dividends or repatriating profits outside the country. Mauritius has no exchange controls, which means that companies and investors can freely convert and transfer funds in and out of the country.

Mauritius has a robust legal and regulatory framework in place to combat money laundering and the financing of terrorism. These regulations, which are aligned with international standards, particularly those set by the Financial Action Task Force (FATF), play a crucial role in the country’s financial system. Applicable legislation includes:

• the Financial Intelligence and Anti-Money Laundering Act 2022;
• the Financial Intelligence and Anti-Money Laundering Regulations 2018;
• the United Nations (Financial Prohibitions, Arms Embargo and Travel Ban) Sanctions Act 2019;
• the Anti-Money Laundering and Combatting the Financing of Terrorism (Miscellaneous Provisions) Act 2020;
• the Prevention of Terrorism Act 2002; and
• the Financial Crimes Commission Act 2023.

Prior to allowing an investor to invest, company service providers have a duty to conduct anti-money laundering and know-your-customer checks. Company service providers apply a risk-based approach when undertaking such checks.

The choice of law and jurisdiction in equity financing transactions can vary depending on the specific circumstances of the deal, the parties involved, and their respective preferences.

It is common for equity financing transactions involving Mauritian entities or assets to be governed by Mauritian law. This is especially the case when the transaction primarily involves local parties or when the assets or business operations are based in Mauritius.

For cross-border transactions or deals involving international investors or the global business sector, it is acceptable to have the laws of other jurisdictions govern contractual arrangements and this is frequently seen. Foreign judgments can be enforceable in Mauritius subject to satisfying certain conditions.

Mauritius is an arbitration-friendly jurisdiction and is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which means that international arbitration agreements and awards are legally recognised and enforceable in Mauritius. It is common for parties to choose arbitration as the method of dispute resolution.

There are no recent regulatory trends for equity finance investors. Mauritius generally is open to investment by equity finance investors and has very few restrictions as previously stated in this chapter.

Dividends paid by a company resident in Mauritius are exempt from tax in Mauritius. Interest paid to a non-resident investor may be subject to a 15% withholding tax, except if paid by a company holding a Global Business Licence from its foreign source of income. Mauritius does not tax capital gains.

Generally, no taxes are payable by investors solely by reason of their investment in an entity in Mauritius. However, where the investor invests into a pass-through limited partnership, part of its share of income may be subject to tax in Mauritius if it qualifies as income derived from Mauritius.

Mauritius has signed some 46 tax treaties to date. Mauritius has also signed the OECD’s Multilateral Instrument to comply with Base Erosion and Profit Shifting.

Upon the commencement of the liquidation of a company, the liquidator has custody and control of the company’s assets. The equity investors cannot transfer their shares in the company save with the sanction of the Court. The equity investor cannot exercise its rights under the constitution of the company except as set out in the law.

During insolvency, equity investors are the last to be paid after all debts and liabilities from creditors are fully satisfied. This means that shareholders are typically last in line to receive any distributions from the company’s remaining assets after creditors, including secured and unsecured creditors, have been paid.

The length of the insolvency process in Mauritius will depend on the complexity, the type of insolvency proceedings, the location of the assets and the situation of the company involved. In most cases the insolvency process can be lengthy and shareholders should generally not expect significant recoveries.

There following mechanisms are available to rescue a company in financial distress. Each has the aim to provide the opportunity for the company to continue in existence and generally provide a better return to equity holders than would result from a liquidation of the company.

Compromise With Creditors

A compromise with creditors is an out-of-court process generally initiated by the company or with the court’s permission by a shareholder or creditor. During the process, the company continues to be managed by its board.

If the company subsequently goes into liquidation, the court may, on application by the company, a receiver or with the leave of the court, any creditor or shareholder of the company, order that such compromise be binding on the liquidator of the company.

Scheme of Arrangement

A Scheme of Arrangement is a court-supervised process that is also generally initiated by the company, or, with court permission, by a shareholder or creditor. During this process, the company’s directors continue to manage its operations. The court can issue various orders including transferring property and issuing shares.

Administration

An administration can be initiated by the company, a liquidator, a secured creditor or the court but not by a shareholder in its capacity as an equity holder. Unlike the compromise and scheme of arrangement where the directors continue to manage the company, in an administration, the administrator takes control of the company. The administration culminates in a watershed meeting where, after having considered the report of the administrator, creditors vote to approve any deed of company arrangement that has been proposed by the administrator, resolve that the administration should end (and return the company to the control of the directors) or resolve for the company to go into liquidation.

The risk for the equity finance provider if their company becomes insolvent is the loss of their investment.