Kenya is pushing for capital markets reforms to reduce the volume of free float or tradeable shares for large companies seeking to list on the Nairobi Securities Exchange, from 25 per cent to five per cent.
This is one of a string of measures that the Capital Markets Authority has fashioned with hopes of attracting new companies and improving liquidity on the ailing exchange, currently weighed down by declining trade volumes and failure to attract new investors and companies.
The amendments to the Capital Markets (Securities) (Public Offers Listing and Disclosures) Regulations 2002, which are expected to be incorporated in next year’s (2019/2020) budget include the reduction in the free float for large-sized companies seeking to list on the Nairobi bourse from 25 per cent to five per cent, as an incentive to float shares to the public.
Luke Ombara, CMA’s director in-charge of regulatory policy and strategy told The EastAfrican that several big firms, whose identity he declined to disclose, have kept off the market because of the high free float requirement.
“Many companies have shied away because of our minimum free float requirement. The truth is that they don’t want a 25 per cent free float but you can see that even one per cent will create a substantial amount of new shares. We therefore retain 25 per cent with no new listings or accept five per cent with new listings and more shares available. You see the logic,” said Mr Ombara.
“This will only be applicable to newly-listed firms. The law will have to be crafted carefully to clarify that and because this could be interpreted as applying different standards, the new firms may be required to comply with the current floating rate within a certain period. It’s a catch 22 as you can see and that is why it has to be discussed and agreed with the stakeholders.”
The regulator has hired a consortium of both local and foreign consultants to help overhaul the entire Public Offers, Listing and Disclosure regulations as part of key measures to breathe new life into a securities exchange that has not pulled an initial public offering from a corporate entity since 2008.
The NSE has been characterised by low liquidity levels where the market is dominated by five large companies — Safaricom, Equity Bank, East African Breweries Ltd, KCB Bank and Co-operative Bank of Kenya — controlling over 70 per cent of the market capitalisation, according to data from CMA for the three months’ period to September 30.
In the past two months alone, the bourse has seen seven companies declare profit warnings to the effect that their earnings for this year will decline by more than 25 per cent.
These are Kenya Airways, Kenya Power, CIC Insurance, Eaagards, self-listed NSE plc and industrial gas manufacturer BOC.
The amendments to the Capital Markets (Securities) (Public Offers Listing and Disclosures) also seek to address other measures such as reducing the minimum number of investors for companies seeking to sell shares to the public to 300 from the current 1,000, and a reduction in the paid up capital from Ksh50 million ($500,000) to a level that is still under discussion.
Currently, firms seeking to list on the Main Investment Market Segment must have 25 per cent of their shares available for trading, while those seeking to list on the Growth Enterprise Market Segment (GEMS) must have 15 per cent of their shares available for trading and held by at least 25 independent shareholders within three months of listing.
However, there are also plans to ensure that firms that want to list on the GEMs only reserve five per cent of their shares for trading but graduated to 15 per cent within four years, and be held by at least 25 shareholders within two years of listing.
“We are basically removing impediments to investments and we are starting with obsolete clauses,” said Mr Ombara. “We are targeting to attract new companies while retaining the existing listed companies by making disclosures less stringent and less costly.”
The top 10 firms listed on the NSE, according to the latest (November) ranking by analysts at Standard Investment Bank include mobile phone operator Safaricom with a market cap of $11.39 billion followed by Equity Bank ($1.87 billion), East African Breweries Ltd ($1.507 billion) KCB ($1.501 billion) and Cooperative Bank ($916 million).
Others are Barclays ($657.8 million), Standard Chartered Bank Kenya ($645.8 million), NCBA Bank ($509.2 million), British American Tobacco Kenya ($477.6 million) and Stanbic Bank ($430.7 million).
It is argued that investors are generally attracted to markets with higher levels of liquidity, the degree at which shares can be easily converted to cash through buying and sell of the stock.
Why liquidity is king
According to the International Organisation of Securities Commission, liquidity— that is how easily assets can be converted into cash — is crucial to both the growth and development of markets and to the financial system stability as a liquid market is able to better absorb systemic shocks.
“For example, a liquid market is able to cushion the price volatility brought about by sudden shifts in investor risk appetite. This in turn helps to limit the potential adverse knock-on effects on the rest of the financial system as well as the broad economy,” according to IOSCO. The presence of liquid markets would in turn ensure a higher degree of investor confidence and market efficiency, and hence render the market more resilient.”