Regulator goes all out to quell persistent NSE listing drought

When the government announced that it would be offloading 30 per cent of its stake in State power generating company KenGen, investors at the Nairobi Securities Exchange (NSE) went berserk. 

The 2007 initial public offering (IPO) was thrice the scale of the government’s previous sale in 1996, when 235 million shares for the national carrier Kenya Airways were floated at Sh11.25 each. 

Investors rallied at the biggest IPO ever, with long queues witnessed outside stock brokerage firms and some selling their equity in other counters to buy KenGen shares, leading to market fluctuations across the bourse. 

The IPO was oversubscribed by 200 per cent and opened the floodgates to retail investors on an unprecedented scale.

Eighteen months later when Safaricom shares went up for sale, the IPO was oversubscribed by 532 per cent. 

Today, however, the situation at the region’s biggest securities exchange is a far cry from the vibrant and thriving bourse of yesteryears.

According to Capital Markets Authority (CMA) quarterly statistics, the NSE 20-Share Index stood at 1,942 at the end of June, down 26 per cent from 2,633 last year. 

At the same time, the NSE is recording high levels of market concentration, with the top 10 companies accounting for 87 per cent market capitalisation, up from 75 per cent in May. 

This means investors are pouring their wealth into a handful of companies, making it difficult for other firms to attract equity investment. 

CMA now says it is currently reviewing its codes and policies to revive the fortunes of the bourse and attract more companies to list. 

“Even before Covid-19, we had seen signs to suggest that there was going to be a global recession,” explained Regulatory Policy and Strategy Director Luke Ombara.

“Short-term federal bonds in the US were attracting better returns than long-term ones, and employment numbers were dipping. Covid has just accelerated the recession, which was imminent as early as 2019.” 

He added that the local regulator is following the move by other market regulators globally that have had to adopt new guidelines to boost investors’ confidence and safeguard shareholder wealth.

“Some countries have set up Covid-19 response bonds, and an example we have seen is Togo,” Ombara said.

“But the tenure is about three months, which might not be appropriate for long-term capital raising, but it is something we can consider.” 

CMA said it is also banking on the setting up of the Nairobi International Financial Centre to help with raising capital resources for large debt or infrastructure projects from the overseas market. 

Last week, Treasury Cabinet Secretary Ukur Yatani appointed four directors to the board of the Nairobi International Financial Centre Authority for a three-year term.

They include Carole Wainaina, a former United Nations assistant secretary general for human resources and chief executive at Africa 50, the pan-African infrastructure investment platform funded by the African Development Bank and 23 countries on the continent. 

Others are Janice Kotut-Sang, the managing director at the Private Infrastructure Development Group, James Mwangi, executive director of the Dalberg Group, and Jonathan Swai.

“We are getting some competition from the Kigali International Financial Centre that is due for establishment, but Kenya has a competitive advantage in that we already have the authority set up and the centre policy and draft regulations,” said Ombara. 

At the same time, the CMA is seeking to review the laws on listing to encourage more companies, particularly family-owned businesses, and small and medium enterprises (SMEs), to go public. 

“We are talking of a complete review and overhaul of the public offers listing and disclosures regulations, which is currently ongoing,” said CMA Acting Chief Exective Wyckliffe Shamiah. 

“We believe the economic recovery will be driven by capital markets through IPOs or equity and debt financing, so revising the regulations to make them more flexible and inclusive is key.”

Part of the current regulations require companies looking to list on the main investment and alternative investment market segments to have a minimum authorised share capital of Sh50 million and Sh20 million, respectively. 

Relaxed laws

For companies looking to list on the growth enterprise market segment (Gems), the minimum capital requirement is Sh10million, figures that are out of reach for the majority of SMEs. 

CMA did not comment on whether these requirements would be reduced, but said other broad-based concessions could be made to ease the raising of short-term capital. 

“The goal is to remove any ambiguities in the current regulatory framework and allow for more participation even from the SMEs,” said Shamiah.

“This includes allowing counties and State-owned enterprises, for example, to raise capital through the bourse.” 

The executive said while most companies are looking for short-term finance for survival, relaxed laws could provide many of them with an avenue to raise capital post-pandemic. 

“We know there are some sectors like pharmaceuticals and digital entertainment that have really performed well during this period and they can be facilitated to expand through the capital markets,” Shamiah said. 

At the same time, the regulator is asking the Treasury to reinstate tax incentives that were removed through the Tax Laws Amendment Act 2020 and Finance Act 2020. 

The amendments include raising withholding tax on foreigners’ dividends by five per cent and introduction of a 14 per cent VAT on stockbrokers’ charges.