A major factor that investors look out for when looking into investing in ship acquisition, is corporate governance and environmental reporting, also referred to as integrated reporting. An investor wants to be sure that the shipping company is both owned and managed by competent people with integrity and that there are adequate checks and balances with respect to the chief executive officer, managing director, the executive and non-executive directors and the board as a whole.
They would also at times want to know the level of the shipping company’s compliance to environmental standard, both domestic regulation and international regulations since the maritime business is essentially an international business. These qualities may be difficult to meet for a shipping company in a developing country particularly where the domestic regulatory environment is not strict on corporate governance standards and may fall below international best practices.
Another consideration for investment in securities are domestic tax treatment to compute taxable profits, capital allowance, double taxation, transfer pricing and how taxable profits affects the shipping company’s retained earnings and changes in statement of equity. These are guided by the laws of the country where the shipping company is located and may not necessarily reflect international best practices on tax.
In addition, what are the regulatory and reporting obligations that the local laws require of the shipping company? Does the shipping company prepare its financial statements in accordance with the international reporting standards or with an internationally accepted financial reporting standard? What are the cost considerations in raising funds on the domestic stock exchange and the international stock exchange?
The above factors on equity financing or debt financing will affect a shipping company in a developing country whether it is trying to raise funds from a domestic or international market. The major challenge for the domestic market, like Nigeria, is the lack of capacity from domestic funders to fund ship acquisition. They may be able to fund ship operations but that is dependent on whether the shipping company owns ships. Secondly it might be difficult to raise capital or funds from the domestic stock exchange for local investors generally do not have the appetite for such long-term capital-intensive investments Where a shipping company from a developing country like Nigeria, is however trying to raise funds from the international market, there can be other levels of complexities and obstacles.
The first is the issue of perception of the safety of investment. The perception, whether rightly or wrongly is that companies from developing countries are badly managed. This perception is further fuelled by the country’s credit ratings on the international market. Since most shipping companies are privately owned, they are usually not guaranteed by any government or public entity in their home country.
Another issue is foreign exchange differences and capital repatriation. The question for investors will be, one, can they properly hedge their foreign exchange risk? Secondly, will they be able to repatriate their funds if and when they want to close out on their investments? Third, how much public sector interference does the shipping company have? Other questions include the dispute resolution mechanism in the developing country. Does it favour nationals and how transparent and efficient is the dispute resolution process in the shipping company’s home country when there are any possible conflicts?
The last but certainly not the least is the timing of the investment particularly in consideration of shipping cycles. An example was with the 2008 financial crisis. It did not matter how good the figures and indices were looking pre 2007 but post 2008, any form of funding into shipping which was badly hit by the crisis, would have been eroded in value by reason of the market volatility and downturn.
The inability of Nigerians to acquire the requisite funding for ship acquisition was the reason the Nigerian government intervened with a fund known as Cabotage Vessel Financing Fund. The fund was initiated for the purpose of disbursing the funds to deserving indigenous ship owners to develop their fleet. The fund was, and is being funded by Cabotage activities within Nigerian territorial waters. The fund has grown to about $350 million as at 2022.
In the above analysis, the factor that may adversely affect a shipping company based in a developing country was analysed. The main factors that would adversely affect such a shipping company domestically would be inability to get adequate funding and possible strict repayment terms and the lack of appetite for such forms of securities on the domestic stock exchange. In the international market, the possible obstacles are perception, regulatory requirements and costs of listing on an international stock exchange, forex risks, corporate governance, tax treatment and possible application of double taxation.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. Her work experience covers both domestic and international commercial legal matters and she belongs to the panel of neutrals of numerous arbitral institutions. She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is also the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector.
She can be reached at: Foluke.A@trizonlawchambers.com
SOURCE: LOYAL NIGERIAN LAWYER