Nairobi's new stock exchange yet to lure small, mid-sized companies

By Rajab Ramah in Nairobi

April 03, 2013

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When the Nairobi Securities Exchange (NSE) launched its Growth Enterprise Market Segment (GEMS) on January 22nd, the idea was to help Kenyan small to medium-sized enterprises (SMEs) raise capital by creating a less exclusive tier of companies trading shares on the stock market.

  • Traders monitor share prices on the floor of the Nairobi Stock Exchange floor in October 2008. [Simon Maina/AFP]

    Traders monitor share prices on the floor of the Nairobi Stock Exchange floor in October 2008. [Simon Maina/AFP]

But to date, not a single company has listed itself on the exchange's new trading board.

The exchange launched GEMS to attract SMEs by easing rules and making it cheaper for such companies to go public, said Kenya Association of Stock Brokers and Investment Banks chairman Willy Njoroge.

"In the Main Investments Market Segment (MIMS) there are stringent requirements such as corporate governance that must be met before a company is listed, and the listing fees are expensive," he told Sabahi, referring to the exchange's more exclusive trading board. "With GEMS, the listing fee is cheap and the process less laborious with fewer rules, but the uptake is not yet pleasing."

The exchange also conceived GEMS in order to improve stability in Kenya's financial system, said NSE Chief Executive Peter Mwangi.

Generating capital

To raise capital, small to medium-sized companies often seek the traditional route of taking out a bank loan, and give little consideration to increasing their liquidity by going public and listing themselves on the stock exchange.

To be eligible for listing on the new trading board, an SME must meet certain conditions, such as proving its registration under Kenyan laws, that it has done business for at least a year and has a minimum of 10 million shillings ($118,000) in liquid capital.

A company does not have to establish a record of profitability but it must be solvent and able to issue at least 100,000 shares, as well as be governed by a board of five directors with no personal history of bankruptcy or criminality, according to the NSE's eligibility rules for GEMS.

The NSE defines small enterprises as companies employing between 11 and 50 people and posting between 5 million to 50 million shillings ($59,000 to $588,000) in annual sales, and it defines medium enterprises as companies employing 100 or fewer workers and posting up to 1 billion shillings ($11.8 million) in annual sales.

Lack of awareness

Although the stock market has loosened the rules for SMEs to go public and trade shares, companies are not joining because of a lack of awareness and information on what they could gain through a listing on GEMS, said James Anyanzwa, a business reporter with Kenya's The Standard newspaper.

"It is surprising that even though many small businesses are grappling with scarcity of funds to grow their business, they are not taking opportunity of this initiative," he told Sabahi. "But this can be blamed on lack of correct information."

Anyanzwa said the government should step up sector specific informational campaigns to increase public interest in investing in stocks, and that SMEs should opt for public listings instead of having to rely on costly bank loans to raise capital.

"Kenya's stock market has mainly been driven by traditional companies in the banking and brewery industry and some manufacturing, but with GEMs we might see entrants from mining, hospitality and even transport sectors get interested -- this will give investors a variety of stock that they can choose from," said Aly-Khan Satchu, chief executive officer of Nairobi-based investment company Rich Management.

In order to address the lack of education, Mwangi said the NSE has created a group of exchange-approved capital financing and investment firms collectively known as Nominated Advisers (NOMADs) tasked with raising awareness among business owners and increasing market participation by providing needed education.

"We hope these NOMADs will approach potential SMEs with the aim of attracting them into the stock market," the NSE chief executive said.

Unaitas Sacco Society Limited, a savings and credit co-operative society, intended to join the NSE, but was unable to meet the listing requirements.

"We were forced to shelve our plans to list at GEMs because of the stringent rules," Unaitas chief executive Tony Mwangi told Sabahi. "For instance, it is difficult for co-operative societies to participate because we have unlimited share capital [in compliance with rules for companies created under the Society Act] and the requirement is that [companies that want] to list must have authorised share capital [which applies only to limited liability companies]."

"We hope this will be reviewed so we can qualify," he said.

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