Introduction

About the SEM

The Stock Exchange of Mauritius is the principal stock exchange of the island country of Mauritius. The
market is located in Port Louis and was founded in 1988. The name of the exchange is abbreviated to
"SEM".
The SEM's "Official Market" has three market indices: SEMDEX, SEMTRI and SEM-7. The SEM's
"Development and Enterprise Market" has two indices: DEMEX and DEMTRI.

History
The Stock Exchange Act 1988 established a small but thriving exchange which is run by the Stock
Exchange of Mauritius Ltd (SEM), a private limited company. The Act also established the Stock
Exchange Commission (SEC), which controls and supervises stock exchange operations. There were
two markets operating on the stock exchange, namely the Official List and the Over-The-Counter
Market (for unlisted shares). There are around 40 companies listed on the Official List, and around
eighty companies quoted in the Over-The-Counter Market. 10 companies are quoted for their
debentures. The Stock Exchange has classified these companies into 7 categories - namely Banks and
Insurance, Industry, Investments, Sugar, Commerce, Leisure & Hotels and Transport. There are also 2
dual listed funds quoted both on the London Stock Exchange and the Stock Exchange of Mauritius.
The SEMDEX - the all shares index - reflects capitalisation based on each listed stock which is weighted
according to its shares in the total market. In its computation, the current value of SEMDEX is
expressed in relation to a base period, which was chosen as of July 5 1989, with an index value of 100.
Trading takes place five days a week and is conducted through an open outcry, order-driven and single-
price auction system. Each share (excluding foreign shares) has a maximum +/- 15% price limit per
trading session. A 1% brokerage commission is charged by stockbroking companies. There is no tax on
dividends or capital gains.
Major developments have been realized through the establishment of a new electronic clearing and
settlement system and the introduction of daily trading (at the end of 1997). Future planned
developments include the introduction of a new electronic trading system and the listing of new
financial products on the stock market. The Stock Exchange of Mauritius was recently promoted from
the status of corresponding exchange to that of affiliated securities markets within the Fedération

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Internationale des Bourses de Valeurs (FIBV) and is also a founding member of the African Stock
Exchange Association (ASEA).
The SEM was opened to foreign investors in 1994 following the abolition of exchange controls. Foreign
investors do not need approval to trade shares, unless the investment is for the purpose of legal or
management control of a Mauritian company. The only restriction is that foreign investors cannot have
individual holding of more than 15% in a sugar company. There is no control on currency repatriation,
and the currencies are fully convertible and market determined. Settlement can be made in foreign
currency and foreign currency accounts can be opened in Mauritius. There are no capital gains taxes and
no withholding tax on dividends procured from trading in officially listed companies.
A major development of 1998 has been the implementation of a Central Depository System, in which all
listed companies are registered. This system allows delivery versus payment (DVP) on a T+3 day
rotating basis. The establishment of a clearinghouse, through the Bank of Mauritius, provides for a
guarantee fund, which incorporates measures for securities and fund settlement failure. The Stock
Exchange in collaboration with international advisers has drafted new listing and reporting rules to
ensure greater transparency for investors. These rules are due to be released during the first half of 1998.

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Listing Requirements of Official and DEM Market

Listing Requirements on the Equities Market.

Introduction.
Companies seeking to be listed on the DEM and Official Market should abide by the listing rules
established by the Stock Exchange of Mauritius Ltd. The latter is also the authority responsible for
listing the securities on the appropriate market, under the supervision of the FSC. The listing rules
govern the admission, obligation and suspension and withdrawal of the securities for each market.

Listing Requirements for the Official Market.

In order to be listed on the Official List of the SEM, the company should show appropriate trading
record with published or filed accounts for 3 years preceding the application. Expected market
capitalisation should exceed Rs 20 million and at least 25% of the total shares should be issued to the
public, with a minimum of 200 shareholders. Moreover, other documentations and information should
be provided so as to enable investors to be reasonably well informed about the securities quoted and the
issuer. Those requirements are as follows:
• The assets and liabilities of the issuer
• The financial position of the issuer
• The stated capital of the issuer
• The profits and losses of the issuer
• The directorship of the issuer
• The rights attaching to the securities
• The prospects of the issuer

Listing Requirements for the DEM.

Companies, before being listed on the DEM, should have a minimum market capitalization of Rs 20
million. At least 10% of their shareholdings are in public hands and bearing more than 100 shareholders.
Moreover, they should present their published financial statements for at least 1 year, prepared in

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accordance with IFRS and audited in accordance with ISA without qualification. However, the SEM
may grant admission to a company having less than 10 % of shareholding in public hands or having less
than 100 shareholders provided that the company undertakes to increase its shareholding in public hands
to 10 % and its number of shareholders to 100 not later than the end of the first year of admission,
failing which the company may be struck off from the DEM. Admission may also be granted to a
company if it has no proven track record provided that the company submits to the SEM a sound
business plan covering at least 3 years and certified by an independent financial adviser, demonstrating
sustained viability of the company and disclosing risk factors.

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Regulation

Supervision of Market Participants

How are market participants regulated?
In addition to monitoring the trading activities of Market Participants, SEM also conducts on-site
inspections of Market Participants to ensure their compliance with the rules and requirements of the
exchange. The SEM may inspect the books, records and accounts of Market Participants and to take
such action as it deems appropriate after such inspections.
Where it appears that a Market Participant may have failed to comply with any of the provisions of the
law or the Rules of the Exchange, the Compliance Department of the SEM shall immediately notify the
Market Participant concerned of such failure and request an explanation. Depending on the seriousness
of the breach, SEM may require the Participant to take remedial action within a specified delay or take
such disciplinary action as permitted under the rules.

SEM also monitors on an on-going basis the financial health of Market Participants to ensure that they
have adequate capital for their operations. Participants must file financial reports with the SEM
periodically. In addition, they are also required to lodge with the SEM, their annual audited accounts.

Enforcement
Market Participants
Section 13(2)(d) of the Securities Act 2005 provides that a securities exchange may make rules, not
inconsistent with the Act, any regulations made under the Act or any FSC Rules, with regard to
enforcement and disciplinary procedures and sanctions to be applied.
Where the SEM suspects a breach of the rules of the Exchange by a Market Participant or any of its
directors, employees or ATS Operators, SEM shall enquire into the alleged misconduct. The breaching
party may be requested to take appropriate remedial action or disciplinary action may be initiated
depending on the seriousness of the breach. The matter will also be reported by SEM to the FSC.

The Stock Exchange of Mauritius (SEM) is supervised and regulated by the Financial Services
Commission (FSC) under the Securities Act 2005 (which replaces the Stock Exchange Act 1988).

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The Securities Act 2005 has come into force on September 28, 2007 by proclamation. The new Act
seeks to enhance and upgrade the existing securities legislation in Mauritius by providing a wider and
deeper coverage of the securities market and is based on standards recommended by the International
Organisation of Securities Commissions (IOSCO).
The main object of the Securities Act 2005 is to ensure a fair, efficient and transparent securities market
and most importantly, to strike an appropriate balance between the protection of investors and the
interest of the securities market. It establishes a framework for adequate regulation of securities market,
market participants, self-regulatory organisations and for the offering and trading of securities. The
Securities Act 2005 draws on modern legislation in other jurisdictions and is based on up-to-date
regulatory and supervisory standards. To give effect to the provisions of the main Act, a number of
regulations are currently being developed by the market regulator, which will be adopted in the near
future.
The SEM has statutory authority to adopt rules governing the conduct of its members and listed
companies and to enforce these regulations. All the rules and regulations of the SEM are subject to prior
approval by the FSC.
The SEM is expected to review the present legislation so as to reflect the standards observable in
sophisticated stock market and to ensure that the new legislation be in line with the harmonisation
process which is underway in the Southern African Development Community (SADC). It is expected
that the harmonisation of the Listing Rules in the SADC region will pave the way to cross-listing and
cross-border activities.
In this context, a reform of the listing function of the SEM has recently taken place, whereby the Stock
Exchange assumes responsibilities for front-line regulation of the listing function of the Exchange's
activities and new listing rules.

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Major Developments on SEM

Automated Trading System of Stock Exchange of Mauritius

Automated trading system of stock exchange of Mauritius ensures improvement in various spheres of
the stock market. Earlier, the stock exchange 's activities were limited to the Official market as well as
the Over-the-counter market. With the advent of the SEMATS, the official market has included other
activities as well.

It is a well-known fact that the way of trading has changed the world over in the last couple of years.
More so, because there are several countries who have removed restrictions on trade. Owing to this
stock exchanges in different parts of the world are trying to improve the operating potentialities of their
trading exchanges. The Automated stock exchanges being updated the world over is a measure for the
same.

SEM or Stock Exchange of Mauritius in the year 1997 founded a Central Depository and Settlement
System also known as CDS. This was done to ensure that transactions pertaining to the stock exchanges
may be settled as well as cleared as per the norms of the G-30 Standards.

SEMATS or Stock Exchange of Mauritius Automated Trading System has been designed to cater to the
needs of equity driven and the debt markets.

Prior to the implementation of the Automated trading system of stock exchange of Mauritius, the
exchange operated in two different kinds of markets. They include:

• OTC or the Over-the-Counter Market

• Official Market

After the implementation of the automated system, the following areas would also be attended to in the
Official market category.

• The Special Terms Boards

• The Odd Lot Board
• The Equity Board
• The Debt Board.

Features of the Automated Trading System of Stock Exchange of Mauritius(SEMATS has the following
features). There are many features only some of them have been given here.

• On line trading facility

• One may avail several prices for one order
• Execution of Order
• On line report of price as well as trade volume

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• Order status may be tracked
• One may avail of an improved data of the stock market.

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Future of SEM
The Stock Exchange of Mauritius are working on the introduction of index and single-stock futures on
local underlyings and also intend to extend derivatives trading on some foreign underlyings afterwards.
The listing of funds and other companies incorporated in the Global Business sector also represents a
potentially attractive opportunity for the SEM. The Listing Division has been mandated to actively
pursue this objective, propose changes to the listing rules if needed and increase the number of listings
of Global funds and companies.

In their quest to move up in the value-chain of products traded on the Exchange, the SEM and CDS,
subject to approval of the Financial Services Commission (FSC), are planning to introduce the trading
and clearing of Index Futures during the financial year 2009/2010. In recent years, the trading of
derivatives on Exchanges has gained growing momentum and has, in some cases, become the focal
point of Stock Exchange operations, with volumes on derivatives surpassing volumes on cash
instruments. Introduction of derivatives trading on many exchanges has had very positive impact on
liquidity in the underlying instruments, enhanced the process of price discovery and enabled visitors,
both retail and institutional, to manage their investment portfolios in a more dynamic manner, better
manage investment risks and enhance portfolio returns over time. Conscious of investors’ need for new
and innovative products that can ensure dynamic portfolio management, the SEM will, as a first step of
a program that hinges on product innovation, introduce futures contracts on the SEM-7 index and on
some of the most liquid stocks traded on the Official Market.

This Brochure summarizes the key benefits and risks associated with these new products, dwells briefly
on their key characteristics and describes how they will be traded on SEM and cleared and settled by the
CDS.

Futures
Introduction to Futures Contracts
Broadly, a future is an agreement to buy or sell a particular asset on a specified future date at a price
agreed upon today.

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When an investor buys an index future (goes long), he agrees to buy the underlying index at a particular
date in the future. His profit (loss) is dependent on the price of the future at expiry of the contract or
when he closes out his position (i.e. when he sells the contract).

When an investor sells an index future (goes short), he agrees to sell the index at a particular date in the
future. His profit (loss) is dependent on the futures price at expiry or when he closes out his position (i.e.
when he buys the contract).

Specifications of Futures Contracts to be introduced

In the initial phase, the SEM plans to introduce futures contracts on the SEM-7 Index and on a few
liquid stocks traded on the Official Market.

Index futures enable investors to obtain benefits of the price movements of the constitutive stocks of the
Index without the need of actually purchasing or selling the underlying stocks of the Index. Similarly, a
Single-Stock future enables investors to obtain similar benefits without the need of acquiring or selling
the Stock in question. The initial investment required to gain exposure to an Index futures or to a Single-
Stock Future is only a fraction of the actual value of the index constituents or of the underlying stock.

Purchasing a SEM-7 Future constitutes a perfect substitute for holding the seven constitutive stocks of
the SEM-7 Index without actually purchasing them.

The SEM will introduce SEM-7 Index Futures with a maturity of one month. The basis of quotation of
each SEM-7 Index Future will be in index points, with each index worth Re 1. Each SEM-7 Index
Future Contract will be equal to 100 SEM-7 Futures.

Single-Stock Futures on the liquid stocks traded on the Official Market will also have a maturity of one
month. The basis of quotation of the Single-Stock Futures will be in rupees and each contract traded will
be worth 100 Futures.

4. Potential benefits of SEM-7 Index Futures or of Single Stock Futures

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The introduction of index futures and single stock futures constitutes an important developmental step
for the Stock Exchange environment in Mauritius and can generate a number of potential benefits for
market participants, while laying the foundations for the upliftment of our stock market to yet another
level. This section summarises some of the potential benefits that the new products can generate for
investors.

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Return of SMDEX.

Diagram 1, below, shows the trend in daily SEMDEX indices for the past 3 years, starting February
2007 till February 2010. The data are taken from the Association of Brokers’ website and represented
graphically.

Diagram 1.

Throughout the three year period, frequent fluctuations in SEMDEX indices are observed. Rises and
falls in the index occurs at several occasions.

In 2007, the index is seen to be increasing over the year. This is due to different factors, some of which
are the measures taken by the government. The imposition of a tax rate on interest on bank savings has
instigated Mauritian individuals to place their money elsewhere such as in Fund companies, shares, etc.
This has caused an increase in demand for shares on the Mauritian stock market thus contributing to the
rise in SEMDEX. Also, increased incentives and awareness by the Stock Exchange of Mauritius have

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contributed in the rise in indices by encouraging investments in shares and buying financial products.
Also, the devaluation of the rupee during that period has also caused foreign investors to invest in local
shares.

However, as from March 2008, the trend in indices is towards the decline. This effect is mainly because
of the financial crisis which has had its repercussion in the country. This will be explained later in the
report.

As from mid of March, the price of indices began to show a rising trend. Sunil Benimadhu, Chief
Executive Officer of the Stock Exchange of Mauritius explained this movement:
“The Mauritius market lost 50% in, as investors worried about the fallout of the global financial crisis,
but then they realized our companies were not so badly affected, from March to December we had one
of the best rebounds in 20 years, with an 80% gain. We have come back with a vengeance. Our economy
was helped by swift reactions from our authorities including easing policies. We have had a volatile
time, but it has also meant a shift to much more trading on the SEM.
Our exchange is trying to develop the “3 Ps” of exchanges – products, players and participants. We
anticipate the players into African markets will only increase, as they realize that expected returns in
the US and Europe are only 1% or 2% and need to get positive alpha. Beyond equity, we are trying to
develop an active second market in debt instruments, and we are trying to move up the value chain and
introduce derivatives, including an index derivative of the 7 most liquid stocks.
In the past Mauritius has been a base for funds investing into India and China, and we have
traditionally been a business gateway between Africa and the East, whether for foreign direct
investment or others. We are now changing our listing rules to allow more funds to list, including the
global business sector,
We have already changed our rules to allow shorting on the Stock Exchange, including rules for stock
borrowing. Institutions are realizing they can make money from their stocks and we are seeing more
liquidity as people are able to trade more.”

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SWOT Analysis

Strength
Mauritius has a vibrant stock exchange with a market capitalization exceeding US $ 6 billion.

Automated Trading System (ATS)

The ATS or the SEMATS is an automatic trading system developed by the Sri-Lankan based
Millennium Information Technology and the staff of the SEM and the CDS, was launched on 29th June
2001. This has replaced the open outcry system which has typified the Stock Exchange of Mauritius
since its inception. It is a computerized trading system designed to match buy and sell orders placed by
stockbroking companies. Each stockbroker has in his office a computer terminal connected with a server
located at the SEM. The central system software consists of an electronic order book which enables
members to post their buy and sell orders on behalf of their clients and to have their orders matched
automatically. When an order is matched, the broker receives immediately a confirmation of the
execution of the trade.

The main strength of the SEM lies in the benefits provided by the ATS, which eliminates the inherent
operational inefficiencies of the manual trading system by improving market transparency, providing a
speedy and efficient matching of orders and enhancing the variety and quality of market data and
information provided to the market. It also ensures a higher degree of fairness, improved liquidity and
cost-effectiveness. This ultimately helps to improve the interests of players in the market and enables
SEM to operate on an equal footing with other leading emerging markets.

Central Depository & Settlement Co Ltd (CDS)

Strength of SEM can also be viewed through the existence of its computerized share trading system. The
Central Depository & Settlement Co. Ltd (CDS) was introduced by the Stock Exchange of Mauritius in
1996 and began to operate in 1997, to provide centralized depository, clearing and settlement services
for the Mauritian equity and debt markets. This has led to prompt and efficient clearing and settlement
of trades while at the same time to the reduction in some of the inherent risks in the process. This has
made Mauritius one of the first countries in the East African Region to offer such services.

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There exists full compliance with the international standards (Group of 30 Recommendations; Core
Principles for Systemically Important Payment Systems / International Organization of Securities
Commission – CPSS/IOSCO Recommendations) on depository, clearing and settlement systems.

The CDS qualifies as an Eligible Securities Depository under the US Investment Company Act Rule
17f-7. This rule requires US registered investment companies to hold their securities only in Eligible
Securities Depositories to reduce risks associated with offshore investments.

The CDS also offers IT outsourcing services to the Stock Exchange of Mauritius Ltd for the technical
management of the automated trading system.

The strength of SEM can be illustrated in the way in which SEM adapts to accounting regulations to
meet international standards. Indeed the Stock Exchange of Mauritius complies with the nineteen
principles of the WFE (World Federation of Exchanges). This step was followed by two close
investigation visits by officers and Board members of the WFE to ascertain in the ground that the SEM
was fully compliant with the standards of well-regulated and operationally efficient Exchanges.

As mentioned by Mr Jean de Fon Chaumiere, the membership of the WFE “identifies the SEM as
having assumed the commitment to prescribed business standards, recognized as such by users of
exchanges, as well as by regulators and supervisory bodies.”

The fact that 43 companies are already admitted to the DEM (Development & Enterprise Market) is
encouraging since it indicates maturity of the market in moving towards a flexible and regulated market
environment, instilling greater investor confidence, protection and dynamism in the securities market in
Mauritius by providing them with new investment opportunities.

Mr Sunil Benimadhu: “The Ai Index Awards constituted an excellent opportunity to showcase to the
international financial community the progress achieved by the financial services institutions in many
African countries. The highly commended status of the SEM and the attainment of the No. 2 position in
the ‘Best African Stock Exchange’ category, testifies the progress achieved on the operational and
regulatory front and can only strengthen international investors’ confidence in our market.”

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The SEM can also be said to be strong in the opening up of its markets to foreign investors in 1994,
subject to certain restrictions, and the possibility of offshore funds to be listed on the stock exchange.
The fact that foreign exchange controls have been suspended in Mauritius in 1994 has facilitated the free
repatriation of funds.

• SEM is widely considered as a reference Exchange in Africa.

• First Exchange in Sub-Saharan Africa to move to fully-automated stock market infrastructure.
• SEM & CDS have been very active and successful in exporting services to Exchanges and
financial services institutions in Africa.
• CDS, in partnership with MIT, has automated the market infrastructure in Kenya, Botswana,
Ghana, Tanzania and Lusaka (forthcoming)
• SEM was ranked No 2 Exchange in Africa after the JSE by Africa Investor in 2007, in terms of
market infrastructure, modern & flexible regulatory environment, and innovative initiatives to
develop capital markets.
• SEM is currently one of the two Exchanges in Africa running a second market for medium-sized
companies.
• SEM is a full-fledged member of WFE.
• First Exchange in Africa to demutualise.
• SEM is one of the three Exchanges in Africa included in the newly launched MSCI frontier
emerging markets Index.

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Weakness
The stock exchange of Mauritius suffers from number of weaknesses. The principal ones are mentioned
below:

• Poor communication system-

The communication system of the stock market in Mauritius is rather poor. This is clear from the
fact that brokers often do not report their transactions to the exchange authorities and clients do not
know how much commission the brokers charge.

• Lack of professionalism-
While there are brokers who are highly professional in their dealings, the majority of brokers seem
to lack high professional standards. Many of them lack the professional expertise to guide and
counsel their clients. Further, they resort to actions, which may hurt the interests of their clients.

• Weak regulation-
Even though the Securities Act 2005, which replaces the Stock Exchange Act 1988 gives the
government with substantial powers, the regulation in practice tends to be somewhat ineffective. The
Financial Services Commission (FSC), which is supposed to supervise and control the stock
exchanges under the Stock Exchange Act 1988 , appears to be grossly understaffed and
overburdened. There appears to be a crying need to strengthen the regulatory machinery because of
phenomenal growth in the volume of trading.

• Dominance of financial institutions-

The stock market in Mauritius is significantly influenced by the actions of financial institutions.
Even though the operations of these institutions are confined to a small group of shares, there impact
is often quite pervasive. Under the influence of institutional buying, the market turns buoyant;
contrariwise, under the pressure of institutional selling, the market becomes depressed.

• Poor liquidity
The Mauritian stock exchange suffers from poor liquidity. Barring a small proportion of scrips,
which are actively traded and highly liquid, most are traded infrequently and, hence, lack liquidity.
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• Kerb trading
Transaction between brokers who assemble outside the stock exchange after market hours are
referred to as ‘kerb transactions’. Though considered a punishable offence, kerb trading flourishes
and the issue whether it is legal or illegal is considered irrelevant by most brokers. In fact, brokers
often report kerb transactions along with transactions done during official business hours.

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Opportunities

The SEM is presently going through a strategic reorientation of its activities and gradually moving away
from an equity-based domestic Exchange to a multi-product internationally oriented Exchange.

1. Changes to listing rules will widen the variety of funds

The major changes which the SEM brought to its Listing Rules in the early 2010 to align them with the
Collective Investment Schemes Regulations 2008 will enable the SEM to be positioned as an attractive
venue for the Listing of Global and Specialised Funds. The Exchange has made its Listing Rules more
flexible to reflect the specific attributes and characteristics of the Specialised Funds it would like to list
on the SEM and this initiative will make the SEM a platform of choice for the listing of a wide variety
of funds such as Specialised Collective Investment Schemes, Professional Collective Schemes Export
Funds and Global Schemes.

2. Introduction of derivatives trading will transform the SEM into an international exchange
The Stock Exchange of Mauritius is seeking to position itself as a reference market both in the region
and on the international arena. As such, the SEM is also keen in diversifying its products offerings
which will enable it to gradually emerge as an international exchange, and in this respect the SEM
decided to introduce the trading and clearing of Index Futures during the financial year 2009/2010. In
recent years, the trading of derivatives on Exchanges has gained growing momentum and has, in some
cases, become the focal point of Stock Exchange operations, with volumes on derivatives surpassing
volumes on cash instruments. Introduction of derivatives trading will have a positive impact on liquidity
in the underlying instruments, enhance the process of price discovery and enable visitors, both retail and
institutional, to manage their investment portfolios in a more dynamic manner, better manage
investment risks and enhance portfolio returns over time.

3. Positive Investment Inflows

From a foreign investment perspective, the Mauritius Bourse attracted strong foreign investor interest
particularly over the last six years, generating positive investment inflows on many listed companies.
Whilst 2007 was a record year, 2008 and 2009 have been resilient in terms of net foreign investment
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flows despite the global crisis, reaching a commendable positive level of net inflows. In 2010, we are
already stepping up our efforts via international conferences and roadshows, which will help to place the
SEM on the radar screen of institutional investors who are keen on frontier emerging markets that are
well regulated and adhere to international best practice.

4. Visibility of the SEM and integration within international financial market

The growing interest from international investors has prompted well-known index and data providers
like Standard & Poors, Morgan Stanley, Dow Jones and FTSE to include our stock market in a number
of new indexes they launched over the last couple of years to track the evolution of some key frontier
emerging markets. SEM also went live on Bloomberg since 2009, and forms part of the only three stock
markets in Africa to be included in the list of stock markets that Bloomberg is tracking live on a daily
basis. This live coverage of the SEM on Bloomberg and global index providers constitutes a positive
step that will enhance the SEM’s visibility at the international level and accelerate the Exchange’s
integration within the international financial markets.

5. Growth of capital markets and broader choice of investment for investors

The preceding achievement can only stimulate the Mauritius Bourse to mobilise its resources to focus on
other ground-breaking initiatives that will fuel further growth of capital markets in Mauritius, and enable
the Exchange to better serve the local and foreign investment community. The SEM has been among the
most innovative exchanges in Africa on the operational and regulatory fronts. It is now currently
working on how to offer its investors a broader choice of investment products ranging from cash
instruments (stocks, treasury bills, corporate and government bonds) to sophisticated derivatives
instruments (futures contracts on SEM-7 Index).

Overall, it is obvious that the SEM has made some important strides in its development process since
1989 and looks well poised to undertake a number of reforms in order to contribute towards the
enhancement of the operational and regulatory efficiency of the local market.In the forthcoming years,
the SEM aims at consolidating its position with a view to further contributing to the development of the
Mauritian economy and of capital market activities on the national and regional fronts.

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Threats
The stock market was opened to foreign investors after exchange controls were lifted in 1994; foreign
portfolio investors recently accounted for almost a third of total turnover. Another key aspect of the
Mauritius economy involves its Global Business Sector (offshore financial sector). Such companies,
designated by Mauritius as Global Business Companies (GBCs), are estimated by Mauritius to account
for approximately four percent of GDP. However, the fact that GBCs account for 90 percent of India's
foreign direct investment suggests that the overall importance of GBCs to the Mauritius economy may
be greater than is suggested by their relatively small contribution to GDP. GBCs benefit from the
favorable tax and regulatory regime. However, the lack of transparency makes it difficult to assess the
degree of compliance with the OECD Principles, which are generally not relevant to the type of business
activity conducted by such firms; moreover, none of these firms are listed in Mauritius.

The SEM operates two markets, i.e. the Official Market, on which securities of listed companies are
traded, and the Over-The-Counter (OTC) Market, which is a more lightly regulated market. Listing
requirements are in line with the standards adopted by international markets. The Official Market
commenced operations in 1989 with five listed companies and a market capitalization of about Mau Rs
2.8 billion (USD 92 million). As of December 2000, 40 companies were listed on the Official Market3
with a total market capitalization of USD 1.3 billion), equivalent to 30.1 percent of GDP for 2000.4
There have been few new listings over the past five years, and market capitalization has declined. This
has been the result of several factors, including the SEM’s lack of liquidity, increased
compliance/disclosure requirements imposed on listed companies, and poor share price performance, as
well as the general trend among major institutional investors towards more developed economies rather
than emerging markets over the past seven years.

AS A SMALL OPEN ECONOMY FULLY integrated into world markets, Mauritius is vulnerable
to external shocks

Globalisation has ushered in a process of integration of the world global financial markets into a mega
market place was evident during the Asian financial crisis of the later nineties and the simultaneous
downturn in stock markets across the world over the past three years. Even though remote small island
states like Mauritius and Seychelles were not connected with the origins of such crises, the effects

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crossed their borders uninvited. Whether we like it or not, financial globalisation is a phenomenon
which is rapidly changing the world economic landscape. Small island states tend to be economically
vulnerable as a result of their high degree of exposure to external economic conditions. This means that
their financial development is likely to be dictated mostly by forces outside their control. In other words,
changes associated with intense competition, maintenance of sound macroeconomic policies,
management of risks, cross-border bank supervision, and modernisation of financial legislation are
likely to be, to a large extent, influenced by events in larger countries.

Modernisation of Financial Legislation and Institutions

The great challenge faced by Mauritius concerns issues relating to implementation and enforcement of
the legal framework, and enhancing the overall institutional capacity to better ensure compliance with
legal provisions. Some small jurisdictions have succumbed to the temptation of allowing money
laundering activities in their financial institutions. This represents a threat to the stability of the
international financial markets, and gives a bad reputation to the jurisdictions concerned. The Indian
Ocean small island states should do their utmost to avoid such pitfalls, and should develop their
financial sectors in line with the OECD guidelines, while at the same time, taking steps to modernise
their financial legislation and introducing control mechanisms to detect unlawful activities.

Financial and Capital Markets

The short-term money, foreign exchange, and treasury bill markets are relatively underdeveloped. This
makes it difficult for banks and other financial institutions to manage and allocate risks efficiently. It
also impedes the development of more sophisticated financial instruments that would enable Mauritian
companies to efficiently hedge risks. The longer-term government and corporate bond markets are also
underdeveloped. This is paradoxical given the strong and rising demand for longer-term assets from
contractual savings institutions.

While the institutional, legal, and technical infrastructure of the stock exchange (SEM)
is highly developed, the market is characterized by low volume, poor liquidity and lack of

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depth. From 1997 to 2002, market capitalization declined from 43 percent to 19 percent of GDP; the
average price–to–earnings ratio fell from approximately 14 to 6; and average turnover hovered around 5
percent, indicating that the market is small, even relative to the small economy.

Many of the challenges which face the market fall outside the scope of government
policy, including the small scale of the domestic market, the need for local investors to diversify
internationally, the recent global bear market, and the withdrawal of foreign portfolio investment from
emerging markets. However, the GOM can take certain policy measures to promote a more active
capital market. Investor confidence can be enhanced by improved standards of disclosure and corporate
governance, and by more effective regulation and supervision of market participants, which is
particularly critical in a market where there is considerable overlapping ownership among issuers,
traders and investors. Measures to diversify the issuer base, including privatizations and greater
regionalization, should also be pursued. Finally, the government should review the role of government-
sponsored funds, which may create distortions in the pricing of securities.

Money Laundering

While the industry confers important benefits in terms of global recognition, and
development of world class financial, legal, accounting, and auditing skills, restrictions on dealings in
local currency and the generally wholesale nature of the offshore financial
business have implied a small impact of offshore activities on employment and economic activity. The
sector does not therefore currently represent a systemic risk for the domestic economy, though it does
pose reputational risks associated with money laundering or the financing of terrorism. The authorities
are aware of these risks, and are taking steps to mitigate them.

The Global Business License 2 (GBL2) firms constitute the most significant source of potential
AML/CFT risk to Mauritius. These companies have no physical presence in Mauritius, and are
inherently difficult to supervise and monitor. Many were licensed at the time when Mauritius did not
have strong customer identification requirements in place. Stricter licensing requirements are now in
effect and monitored, and the FSC is vetting existing license holders.

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The regulation and supervision of the securities industry require considerable strengthening. The FSC is
currently preparing key legislation with respect to securities, collective investment schemes (CIS), and
market intermediaries. Completion of this legislative agenda is critical to address existing deficiencies
and gaps in the legal and regulatory framework. Many of the challenges which face the market fall
outside the scope of government policy, including the small scale of the domestic market, the need for
local investors to diversify internationally, the recent global bear market, and the withdrawal of foreign
portfolio investment from emerging markets.

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Impact of Financial Crisis on SEM

Global Financial Crunch

The US subprime crisis has been building up over several years. Banks and mortgage lenders have been
issuing too many high-risk home loans (called subprime loans), which. is now causing havoc in the
global financial system.

What Caused The Sub prime Crisis?

Due to rising interest rates, falling property values and other macro-economic factors, some Americans
are finding it impossible to keep up with their subprime mortgage repayments. This has caused wide-
scale mortgage defaults, leading to home repossessions.
The problem is these homes are not worth as much as they once were. So the equity locked in the house
is not enough to repay the original loan.
Disturbingly, these people were originally flagged as having poor credit histories, but that did not stop
mortgage lenders from handing out massive loans to fuel the property boom.
To make things worse, these subprime mortgages were passed on by the banks in the guise of complex
financial products, which were then re-sold to investment funds. The result is that the banks and the
general public is now exposed to this excess of "bad debt" – i.e. money that will never be paid back –
through pension and investment funds. The situation is labeled the subprime crisis for originating from
subprime loans.

Financial crisis in Mauritius

The emergence of the US Credit Crisis has led towards stronger financial integration among
international financial markets. In that respect, SEMDEX, the main index for the Stock Exchange of
Mauritius, is also believed to follow any movements in foreign stock markets. Indeed, the crisis has
already affected the real side of the Mauritian economy in form of lower demand for hotels, undermined
export of textile products and lower entailed higher risk aversion level with psychological investments.
Above all, with substantial rise in risk aversion from the crisis, this has effects such as herd behaviour
impregnating the performance of SEMDEX. Ramlall (2009)

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The economic outlook in the US and EU, the two largest export markets of emerging countries, has
worsened as the credit crisis has deepened and some major players are in recession. How does this affect
us?
The grey outlook for Europe has affected the performance of our hotel stocks. Tourist arrivals are also
bound to suffer as our tourists come mainly from Europe.
The now famous "financial crisis", which started in the US markets in July 2007, has already had a spill-
over effect on European banks and other global major banks and economies. A recent observation that
sums up of how people view the current situation: "On the left side of the balance sheet, nothing is right,
on the right side of the balance sheet, nothing is left." Though some might argue that most economies
are decoupled with one another, we believe that the Mauritian economy and local stock market is fairly
correlated with US and European economies. From February 2008, the local stock market and Mauritian
economy (which have seen growth forecasts trimmed) have been put under enormous pressure and
major players such as the Central bank have been in the dilemma of sustaining growth or inflation
control, thus the split in the Central Bank Monetary policy.
Between the positive assurances of our ministers and the pessimistic outlook of our lobby groups, it can
be hard to make sense of how the financial crisis has and will continue to affect the Mauritian economy.
Being a small and open economy, Mauritius can hardly be sheltered from global economic hiccups.
Over the past six months, exports to Europe, our main trading partner have come under increasing
pressure and tourism receipts have slowed. Over the next year, the current account deficit is likely to
widen and volatile capital inflows should continue to slow. Despite a favourable interest rate differential,
the Mauritian Rupee has come under sustained pressure since the end of April and has since then
depreciated by 17% vs. the USD putting a negative dent on inflation. The medium term outlook for the
MUR/USD remains uncertain but biased towards the downside unless a sudden large inflow of Foreign
Direct Investment. On its part the mere fact that Europe may be in deeper trouble than the US has had a
negative impact on the EUR and the USD has rallied from 1.58 to 1.34 USD/EUR. Volatility in the
MUR/USD exchange rate has shot up in recent months and the recent 40M dollars worth of dollar sales
in the FOREX market has done precious little to break the Rupee's volatile trend. Hence the Rupee has
been negatively affected by the crisis so far. Over the next twelve months, the Bank of Mauritius is
likely to be forced to sell more dollars in the market as our trade balance deteriorates (supply of forex
dries up as export receipts slow) which in turn is likely to absorb in a certain amount of Rupee liquidity
out of the money markets. The crisis seems to have redirected the priorities of the Monetary Policy

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Committee towards growth rather than inflation. Real interest rates in Mauritius are negative and
detrimental to long term growth. The emergence of the US Credit Crisis has led towards stronger
financial integration among international financial markets. In that respect, SEMDEX, the main index
for the Stock Exchange of Mauritius, is also believed to follow any movements in foreign stock markets.
Indeed, the crisis has already affected the real side of the Mauritian economy in form of lower demand
for hotels, undermined export of textile products and lower investments. Above all, with substantial rise
in risk aversion from the crisis, this has entailed higher risk aversion level with psychological effects
such as herd behaviour impregnating the performance of SEMDEX.

2007

The path of the main indices of the Stock Exchange of Mauritius (SEM) appeared to have followed a
similar pattern as those of the South East Asian economies. The SEMDEX which is the key index of the
SEM remained on the rising trend throughout 2007 influenced by the booming economy and its
remoteness to the financial turmoil. This was perceived as positive for many investors in quest of
lucrative investments. While banks continue to trail behind rising profits, hotels had part of their
earnings adversely affected by the appreciating rupee.

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The local market remained buoyant throughout 2007 despite uncertainty surrounding financial markets
internationally. The SEMDEX posted a return of about 53.78 percent in 2007 while in the first quarter
of 2008, the index achieved a return of 1.55 percent, synonymous to a significant correction. The main
drivers for the upbeat market emanated from the blue chips, basically the banks and hotels sector, which
continued to reap higher profits. The SEM-7, which comprises the seven largest eligible shares in terms
of market capitalisation, liquidity and investibility gained 80.55 percent in 2007 while in the first quarter
of 2008, it posted a negative return of 1.46 percent. The SEMDEX hit a fresh closing high of 2,101.37
points on 18 February 2008, boosted by the announcement of one bank’s pretax profit growth while
another listed bank posted an increase in group results. Moreover, the imminent listing of a company on
the SEM is also likely to be supporting sentiment.

The financial year 2008/2009 was marked by the severe global financial crisis which started in the
United States and spread rapidly to Europe and the rest of the world. The Mauritian stock market
which historically had shown low correlation with the global markets, was not spared this time. The
SEMDEX (all shares index) lost 36.14% in 2008 while the SEM-7 (blue chip index) lost 44.03%. As
the crisis spilled over to the real economy, there was a sharp decline in market turnover in
December 2008 and in the first quarter of 2009. However , with the P/E ratios and dividend yields
reaching attractive levels, the market turnover picked up again in the second quarter of 2009. The policy
responses to the crisis together with the significant reduction in interest rates, contributed to a major
boost in market performance in the second quarter of 2009. After loosing 9.36% and 12.03%
respectively in the first quarter of 2009, the SEMDEX and SEM-7 gained 32.22% and 36.65 %
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respectively in the second quarter of 2009. The worldwide policy responses to the crisis would lead to
a gradual recovery of the global economy in 2010. It should be noted that the Mauritian banking system
showed a lot of resilience and the banks were not affected by the subprime crisis. Moreover , the
economic reforms and prompt stimulus packages initiated by the Mauritian government allowed the
country to steer through the crisis relatively unscathed and be ready to bounce back in the near future.

Growth picture towards the downside

Mauritian stocks too have not been sheltered from this crisis. While sensitisation by the media has
certainly contributed to a certain degree of panic and aberration in the prices of certain stocks, local fund
managers have continued to increase their cash positions and have reduced their exposure to the hotel
stocks favouring instead the relatively more stable and liquid bank stocks. This in our view puts a floor
on the prices of these stocks as our market remains dominated by institutional based funds. The grey
outlook for Europe has darkened significantly in recent months, so too is the performance of our hotel
stocks. Whilst many have sold in panic, investment professionals have already priced in the less rosy
earnings outlook for 2009 and have substantially raised the cash level of their portfolios starting July
2007 and June 2008. Once there is more certainty as to when Europe and global economy will recover,
we may see rotation towards hotel stocks again which is not likely to happen any time soon or before
first half 2009.
On the inflation side we have noticed that it has negatively affected profitability across the board as
operating costs have increased drastically. The growth picture, as we see it, is biased towards the
downside in 2009 but GDP growth should, we believe, remain above 4%.
However, we believe that there is value to be found in many stocks, with many of them trading at a Price
Earnings Ratio below 10, for investors with long term view. There will be a lot of volatility in the
coming months and while prices remain biased towards the downside in the short term, if you are patient
and have a well diversified portfolio, we would certainly recommend staying in this market for now or
coming in when prices are so depressed.
As many believe that the current crisis can be judged in retrospect as the worst one since Second World
War we believe that the global economy is in better and stronger shape than it was in other crises, thus
has no reason why it will last forever. Despite the financial pain, stock markets will surely forget this
financial hangover when the next speculative party begins. Financial markets aren't dancing now, but
they will surely dance someday, it is not the first crisis and surely will not be the last one. Investors must

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remember that the stock market is forward looking and is a leading indicator of economic activity as it
tends to recover before the economy or falls fall before a recession. If Europe recovers in 2010, then our
stocks should begin to recover in 2009.

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Conclusion.
The Stock Exchange of Mauritius is considered as a vehicle for economic growth and economic success
for Mauritius. The progression in the indices is attributed to measures and incentives by the government
and in collaboration with the stock exchange. The SEM’s contribution to the financial sector is
attributed to its innovative products and services together with providing proper information and
awareness to Mauritian investors. Currently, the SEM offers the possibility for even offshore companies
to be listed on its market.

Rules and Regulations by the stock exchange set up an effect of simplicity in the transaction and create
flexibility. The Financial Services Commission, as a regulatory body, ensures transparency and viability
of investing in shares. Moreover, the implementation of the SEMATS has helped to improve the
interests of players in the market and enables SEM to operate on an equal footing with other leading
emerging markets.

The recent financial crisis had had severe repercussions in SEM Indices and many other financial
products. But now overall share prices are rather stable and are even showing a positive increase in the
long run since mid 2009.

Overall, it can be observed that the SEM is running through rapid growth and innovations and may
eventually stand among leading stock exchanges of Africa, despite of its geographical proximity to other
emerging economies. But still, there need to be even more works and efforts to improve the efficiency of
the stock exchange to provide the investors with a better platform in which they can invest their money
and have good return.

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