What it means to list a company on a securities exchange

Why would a company list on the stock exchange in the first place? What are the different market segments available for companies to list on the Nairobi Securities Exchange (NSE)?

First, listing a company involves making available to the investing public shares of a public company through placing the shares on an official stock exchange.

“Contrary to common perception, listing shares on an exchange does not always involve selling shares to raise capital but may be done for other reasons,” says Cytonn Investments.

Selling shares to the public for the first time with the aim of raising capital is referred to as an Initial Public Offer (IPO), the amount being raised from the issue is known in advance and when no capital is being sought in the market it is referred to as a Listing by Introduction.

Examples of companies that have listed by introduction in Kenya include Equity Group, Flame Tree Group Holdings Ltd and Deacons (East Africa) Plc, while Superior Homes (K) Ltd is also pursuing a listing by introduction.

There are many reasons that a company can choose to list on an exchange other than raising capital, which include:

1. To gain access to the capital markets in the future – the capital markets offer a ready form of funding for companies, enabling them to embark on growth and expansion plans or to fund their working capital with greater ease,
2. For share price discovery – listing will allow a company’s shares to trade on an official stock exchange, with the price determined by market demand and supply forces. This will allow for generation of a market determined valuation for the company,
3. To increase transparency and disclosures to the public – when a company lists, it is subject to regulation and hence will be required to disclose certain pieces of useful information that are useful to the investing public,
4. To improve on corporate governance practices – listed companies are expected to adhere to corporate governance practices as prescribed by regulation,
5. To enhance the company’s image – listed companies are usually well known by the public and viewed as more transparent and credible, having passed the regulator’s keen tests. This will serve to boost confidence in the company and open up the doors to a myriad of opportunities it can explore,
6. To provide existing shareholders liquidity for their shares – once shares of a company are listed on an exchange, shareholders have an avenue to exit their shares at will to the investing public in the capital markets,
7. Make it easier for it to cross-list on other exchanges – once a company has already successfully listed on one stock exchange, it is perceived to have already been through scrutiny and due diligence procedures, and has gone through the whole listing process once, hence the process of listing on another exchange will be less tedious.

The NSE market has grown since its establishment in 1954.

The most recent developments are the operationalization of the GEMS, the introduction of the derivatives trading, REITs and exchange-traded funds.  

In 2001, the NSE was split into three market segments according to the type of investment and type of asset class, and in 2013, a fourth segment was introduced to give SMEs an opportunity to access the capital markets and grow their businesses.

The four segments are discussed below:

1. Main Investment Market Segment (MIMS): This is the main segment of the NSE where most companies are listed. It is suitable for bigger companies that have been around for a longer period of time as it requires submission of at least 5-years of audited financials, 3 of which should be profitable years; Kshs 50.0 mn worth of fully paid up share capital and Kshs 100.0 mn in assets,
2. Alternative Investment Market Segment (AIMS): This market segment is better suited for medium-sized companies that have at least Kshs 20.0 mn in assets and Kshs 20.0 mn of fully paid up share capital at the time of listing,
3. Fixed Income Securities Market Segment (FISMS): This segment was designed to incorporate listing and secondary market trading of fixed income securities, mainly corporate and government bonds,
4. Growth Enterprises Market Segment (GEMS): GEMS was introduced to provide a regulated platform whereby SMEs could gain access to cheaper capital market funds and benefit from the regulatory environment that comes with it, promoting corporate governance and transparency. Its requirements were made less stringent to accommodate the smaller growth companies, with requirements such as no minimum firm asset value and profitability record required, submission of audited accounts for just the year that precedes the year of listing, and a minimum of Kshs 10.0 mn in paid-up share capital.

Ways in which companies can get listed on the various segm