13 August 2018

Kenya: Incubating Alternatives to the NSE's Big Five

Kenya has started persuading investors to look beyond the five dominant companies that control trading on the stockmarket in an effort to invigorate activity on the Nairobi Securities Exchange.

The government hopes to achieve this through the Incubator and Accelerator Boards, a joint initiative by the Capital Markets Authority, the NSE, the National Treasury, brokers and investment bankers.

Amish Gupta, the project manager, said that the restructuring and documentation for the boards are almost complete, subject to approval by the regulator.

Through the programme, the CMA and the NSE are identifying start-ups and other companies with potential to list and preparing them to float shares on the exchange.

The idea is to give investors more options and reduce overreliance on a few blue-chip companies.

The plan is based on the fact that the share price changes of the NSE Big Five do not necessarily reflect the general performance of the market and the true state of the economy, thus making it difficult for investors to make sound investment decisions on which stocks to buy or sell.

The CMA concedes that Safaricom, East African Breweries, Equity Bank, KCB Group and Co-operative Bank dominate trading activity on the NSE, thereby putting the stability of the market at risk.

The NSE has 67 listed companies, but the five command close to 69 per cent of the total value of shares listed, estimated at Ksh2.5 trillion ($25 billion).

"These five companies do not give the true valuation of the market, because they are large, highly liquid and trade large volumes of shares daily. The danger is that in the event of a negative shock, the whole market will come down," said Daniel Kuyoh, an analyst at Alpha Africa asset managers.

Policy proposals

The CMA says it is pursuing policy proposals such as revival of privatisation "to enable highly profitable state corporations to list on the exchange, providing investors with more options."

"The Authority is also reviewing its public offerings regulations to identify regulatory roadblocks inhibiting small and medium enterprises from listing and raising funds on the exchange," said a statement from the authority.

Under this programme, NSE will provide financial experts to help shortlisted companies put their corporate governance and financial structures in order and ensure that they meet the criteria for listing.

Under the incubator and accelerator programme, SMEs and family-owned businesses will be persuaded to consider listing.

Investment and financial experts will deal with potential issuers through face-to-face engagements with a view to reviewing their corporate and governance structures and preparing them for listing.

The incubator board will host firms that require restructuring in terms of financial, technical, operational, commercial, strategic, governance, environmental, and legal compliance and policies, procedures to move them to the Accelerator Board.

At the Accelerator Board, the restructured firms will be required to choose either equity or debt financing.

The 64-year-old bourse has not attracted an initial public offering from a corporate entity since 2008, except the self-listing of the NSE itself in 2014, while the Growth Enterprise Market Segment market, the trading platform for small and medium-sized firms, has only attracted five companies since it was launched in January 2013.

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