AgCLIR Chapter: Protecting Investors
Agricultural enterprises have a number of options for raising capital to pay for their inputs, equipment, and other costs of growing a business, most of which are appropriate instead of—or in addition to—seeking a loan from a bank or other lender. Of course, each option carries not only the promise of economic gain, but also the risk of loss. The more that investors feel that they are protected against loss—particularly the kind that can be prevented through better information, more thorough scrutiny of an enterprise’s financial history, and faster access to prompt and fair dispute resolution—the greater the possibility that they will invest.
First, at the grassroots level, individual farmers with relatively few resources may pool their capital as cooperatives, or, as referred to in many countries, “farmer-based organizations” or “associations.” In general, cooperatives are businesses owned and controlled by the farmers who use their services. Supply cooperatives supply their members with inputs for agricultural production, including seeds, fertilizers, fuel, and machinery services. Marketing cooperatives are established by farmers to undertake transformation, packaging, distribution, and marketing of farm products (both crop and livestock). Farmers may also rely on credit cooperatives as a source of financing for both working capital and long-term investments. Cooperatives can play an important role in rural communities, where they encourage democratic decision-making processes, leadership development, and education.
Second, agricultural enterprises—whether they are independent local producers or outsiders who aspire to develop business opportunities in the sector—can seek capital, whether in the form of money, equipment, or other valuable contributions, from private investors, including individuals, firms, and outlets of “venture capital.” There are many examples of successful investments in agriculture throughout the developing world, and they exhibit certain key traits that provide lessons to others. These include the investors’ willingness to invest for the long term, rather than to require immediate dividends; the use, in certain contexts, of a “nucleus” farm model that contributes to greater quality control on out-grower farms; creative use of public-private partnerships, including seed agencies, international manufacturers, farmers cooperatives, and others; a well-functioning legal system; a commitment to international standards in corporate governance, bookkeeping, and other business practices; and careful understanding and development of markets. However, due to the high degree of risk in agriculture—often compounded by poor seed, irrigation, transportation, infrastructure, and land rights—the availability of capital investments in agricultural enterprises may be low. Encouragement of investment in agriculture requires a multifaceted effort to reduce or control such risk.
Third, larger or especially ambitious enterprises may seek capital by offering shares to the public through a national stock exchange. Although public trading of stocks (also called “securities”) usually appeals to larger, existing enterprises that seek to build capital (as opposed to most small and medium-size enterprises (SMEs)), public ownership should not be overlooked as a future destination for growing agricultural enterprises that are fundamentally strong and have demonstrated the potential to do even better. There is a range of public ownership models throughout the world. In some less-developed countries, particularly those engaged or recently engaged in conflict, there is no stock exchange at all. In several transitioning economies, a stock exchange has been established in recent years, often as a mechanism to privatize formerly state-owned enterprises or to otherwise attract foreign investment. In still others, such as India, Indonesia, Kenya, and a number of Latin American countries, there are dynamic, thriving stock exchanges that have been in place for many years.
Under typical cooperative, company, investment, and securities laws, investors are provided with a number of important rights. Doing Business distinguishes three dimensions of investor protection: transparency of the company’s transactions, particularly those directly aimed to enrich company directors; liability for self-dealing of directors—specifically, the means by which they can reduce the value of the company rather than increasing it; and the ability of shareholders to sue officers and directors for misconduct. As in any area of the law, protections of rights are only as strong as the institutions that support them. Key institutions include local, regional, and national cooperative societies; investment agencies; securities regulators; courts and other legal institutions; and such ministries as agriculture and commerce or trade. Vibrant systems of professional services and associations, higher education, and media are also critical components of a healthy investment environment.
For more information, please see the Protecting Investors – Lessons from the Field Briefer.
AgCLIR Case Studies
AgCLIR assessments on ‘Protecting Investors’ have been conducted in the following countries: