From deep cuts in corporate debt transaction fees to relaxing rules on Initial Public Offerings (IPOs), Kenya looks determined in restoring the lost glory of investments on the Nairobi Securities Exchange (NSE).
President Willam Ruto is also promising to have up 10 State-owned firms listed on the bourse within a year— all signs that the government is desperate to revive action on the region’s largest stock market.
“The market is in desperate need of a shakeup. Something new. Something to awaken it from a deep slumber. Hence was pleased to hear the new administration considering floating some public companies. I can only wish they pick the solid ones” said Rufus Mwanyasi, managing director of Canaan Capital Limited Capital in a media commentary.
The Capital Markets Authority (CMA) and the National Treasury have in the past three months rolled out a series of changes that are anticipated to spur fresh interest in the bourse that registered a frenzy by both small and big investors during the late President Mwai Kibaki’s regime.
As part of these reforms, the Treasury has already slashed the total fees payable by an investor for corporate debt in the secondary market by 10 percent as part of a strategy to boost activity in the segment.
In the new pricing schedule by Treasury Cabinet Secretary Ukur Yatani, investors now pay a total transaction fee of 0.0035 percent for corporate debts in the secondary market, down from 0.035 percent previously. This comes in the wake of a renaissance of issuances in the corporate bond market where the Kenya Mortgage Refinance Company recently floated a facility that attracted bids worth Sh8.1 billion for a targeted Sh1.4 billion capital raise.
Other corporates that have issued bonds recently include East African Breweries Ltd (EABL), Family Bank, and Centum Real Estate.
EABL’s Sh11 billion bond was oversubscribed by over three times, pointing to renewed investor confidence in the previously troubled local bond market. Investors bid a total of Sh37.9 billion in the issuing round, EABL said, representing an oversubscription of 275 percent.
Family Bank bond raised Sh4.42 billion, marking a subscription of 147.3 percent, against a Sh3 billion target with a greenshoe option--an over-allotment option-- of Sh1 billion in its first tranche of the corporate bond offer via public placement.
Centum Real Estate Company listed its Sh3 billion project bond on the Nairobi Securities Exchange, allowing investors to trade the security before it matures in 2023.
Buoyed by the resurgence of activity on the NSE, the CMA has also joined the fray with revised rules that aimed at softening the ground for more IPO listings and bucking a prolonged trend of inertia.
The NSE has not had an IPO since 2015 when property investment fund ILAM Fahari I-Reit was listed on the NSE after raising Sh3.6 billion.
CMA is now keen on ending this trend with radical shifts in the playbook including striking out a rule that restricted IPO listings to public companies limited by shares and registered under the Companies Act. A public company limited by shares is a legal entity that is separate and distinct from its members and directors or management.
“The issuer to be listed (in the main investment market segment) shall be a body corporate duly incorporated and or registered under the laws of Kenya. The issuer must have been in existence for at least five years,” the CMA says in draft regulations. Should this proposal be adopted in the final rules, the window for listing could be opened to entities registered under the Limited Liability Act 2012.
The regulator also targets to relax a requirement on the profitability of firms seeking to go public in the main investment market segment. Presently, the law provides that an issuer must have declared profits after tax attributable to shareholders in at least three of the last five completed accounting periods to the date of the offer.
“The issuer must have been in existence for a minimum of five years one of which should reflect a profit with good growth potential and a revenue earning record,” the draft regulations provide pointing at a softer profitability requirement than is currently the case.
The CMA further targets the entry of Special Purpose Acquisition Companies (SPACs) that would help counter the growing influence of Private Equity (PE) firms, that have drawn investors leaving the markets dry.
SPACs are companies that have no commercial operations and are formed strictly to raise capital through an IPO or to acquire or merge with an existing company. According to the draft regulations, an issuer applying for the listing of its shares on the main investment segment as a SPAC must have a market capitalisation of not less than Sh 1 billion based on the issue price.
SPACs, also known as blank-cheque firms, are generally formed by investors or sponsors with expertise in a particular industry or business sector, to pursue deals in that area. In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don't identify that target to avoid extensive disclosures during the IPO process.
“SPACs have relatively lower underwriting and completion fees. Shorter time frame to listing and the fact that valuation can be determined based on prior negotiations between SPAC sponsor and target company as opposed to the traditional IPO where stock price is entirely dependent on market conditions and listing time,” says the regulator.
To further catalyse the issuance of securities in the market, CMA is also proposing the rollout of a small and medium-sized enterprise fixed-income securities segment, which will allow the raising of debt by listed small and medium enterprises (SMEs).
“The minimum size of the issue shall be Sh20 million and a maximum of Sh250 million. The minimum subscription shall be Sh10,000 or a such higher amount as the Authority may prescribe from time to time,” the regulations provide regarding debt issuance by listed SMEs.
CMA, however, seeks to tighten scrutiny of books presented by entities seeking to go public and gain greater visibility of firms’ audited accounts than it has in the past.
The current regulations provide that an entity seeking to go public in the main investment market segment shall have audited financial statements complying with International Financial Reporting Standards (IFRS) for an accounting period ending on a date, not more than four months before the proposed date of the IPO or listing for issuers whose securities are not listed at the securities exchange, and six months for issuers whose securities are listed at the securities exchange.
The draft regulations add a new dimension to this provision. “The issuer shall have audited financial statements complying with IFRS for the last three accounting periods including the accounting period ending on a date not more than four months before the proposed date of the commencement of the IPO or listing for issuers whose securities are not listed at the securities exchange, and six months for issuers whose securities are listed at the securities exchange,” the regulations say.
