Regulators have been urged to focus on making the process of listing appealing to companies while still maintaining investor protection and not sacrificing minimum requirements for disclosure.
They should sensitize companies on the importance of listing to the NSE as well as focus on liquidity-enhancing mechanisms, such as securities lending and short selling, derivatives like commodity contracts, stock and currency futures to deepen the capital markets and provide a range of options to investors.
This is according to Cytonn Investments weekly report themed ‘Unlocking New Listings on the Nairobi Bourse’ which noted that the government should stimulate the Capital markets through the privatization of state-owned enterprises through the Nairobi Securities Exchange (NSE).
The NSE has struggled to attract new listings, having only raised 4.2 billion shillings in two initial public offers (IPO’s) in the last 5-years, with one each in 2014 and 2015 by NSE and Stanlib Investments, respectively.
Currently, the bourse has 64 listed stocks with a total market capitalization of 2.16 trillion shillings, of which Safaricom controls 44.0 percent market share.
The Capital Markets Authority (CMA) has raised concerns that Kenya has been unable to achieve its projected listings targets as articulated in its Capital Markets Master Plan, which envisions at least four listings on the NSE every year.
CMA has also noted that a few large-cap stocks, namely Safaricom PLC, East African Breweries Ltd, Equity group Holdings and KCB Group Ltd, hold almost 75.0 percent of the total market capitalization, making the market volatile, due to the dependence on these few stocks, which presents a risk of a market collapse should anything happen to those companies.
To address the issue of low number of listings as well as slow uptake of the capital markets products in Kenya, CMA has been embarking on offering incentives to attract companies with the potential to list to the bourse.
The incentives have, however, not boosted the number of listings and Cytonn believes that comes about as a result of the measures undertaken to address the low number of listings which have not taken a bottoms-up approach to identify the real impediment to listings, focusing mainly on tax exemptions whilst there are a number of deep underlying issues that still need to be remedied, in order to make the country’s capital market robust.
Stringent regulatory framework and disclosure requirements, Harmonizing tax incentives between Bank Funding and Capital Market Funding, Costs associated with listing, Size of companies, Market infrastructure, Loss of control, Shallow market, The rise of Private Equity firms providing easily accessible capital and False Market Perception that Capital Markets Should Play a Second Fiddle to Banking Industry have been mentioned as some of the key issues that need to be addressed in order to unlock capital in the capital markets.
In order to facilitate growth in the number of new listings as well as development of products in the NSE, Cytonn has recommended that embarking on privatization of some of the state corporations through listing, Harmonizing tax incentives, Review of rules and regulations, Engaging with private equity firms to consider exiting through the capital markets and Awareness programs aimed at enhancing literacy on capital markets will act as the needed remedies.