Advertisement

Kenya’s CMA develops new rules on suspension and delisting of firms

Saturday September 12 2015
EADELISTING

Kenya’s capital market regulators have developed new guidelines to govern the suspension and eventual delisting of companies that flout listing regulations. PHOTO | FILE

Kenya’s capital market regulators have developed new guidelines to govern the suspension and eventual delisting of companies that flout listing regulations.

The new regulations are a response to concerns over the increasing number of companies that are sliding into the negative working capital territory, putting investors’ wealth at risk and undermining investor confidence in East Africa’s largest stock market.

Working capital is the liquid money companies need to spend on regular business expenditures. It is the difference between current assets and current liabilities.

According to the proposal on the suspension and delisting of listed companies, offenders will be suspended for six months before being delisted. The Capital Markets Authority (CMA) will also have powers to institute immediate suspension of listed companies, if it deems fit, to protect the interest of the investors, pending review of the case.

Further, companies and their directors forced to delist from the Nairobi Securities Exchange will not be allowed to directly or indirectly access the exchange or seek listing for any shares for five years from the date of such delisting.

Commercial banks are however, exempted from having a positive working capital owing to the nature of their business where short-term assets are matched with long-term liabilities.

Advertisement

Those that will be hard hit include manufacturing companies that are required to maintain positive working capital at all times failure to which sanctions will be imposed including a penalty of Ksh10 million ($93,239.2).

“Manufacturing companies must have positive working capital at all times. In instances where this requirement is applicable but it is not complied with, we have a number of administrative actions to take including caution, fines, suspension and delisting of the issuer,” a source who declined to be named told The EastAfrican.

Offenders will however have a chance to defend themselves before sanctions are imposed.

“There is an option of suspension but it is not automatic because we have to give the issuers the right to be heard. They have to tell us how long it would take them to comply but this is where we have had a problem because this timeframe is not provided in the current law,” said the source.

The new policy framework dated June 2015, cites countries and exchanges such as India, Singapore, NASDAQ, and New York Stock Exchange as having comprehensive delisting rules and procedures for both voluntary and mandatory delisting but Kenya only has rules and procedures for voluntary delisting.

Though Kenya’s current law on suspension and delisting of listed companies is adequate in terms of giving the Authority powers to delist a security, it is not explicit enough in providing the procedure as well as the timelines.

The period within which a company is supposed to comply ranges from six months in the US and India to 24 months in Singapore, according to the proposed policy framework.

“We are now refining our mandatory delisting regulations to ensure that there is a specific time within which the issuers are supposed to comply, failure to which we suspend the company and invoke procedures for its delisting,” said the source.

At least seven firms trading on Kenya’s securities exchange do not have enough money to pay off short-term debts and finance day-to-day expenditures.

Investigation by The EastAfrican revealed that these companies do  not have adequate capital to cover their short- term (12 months) financial obligations and at the same time finance day-to-day operations of the business.

An inspection of the companies’ half and full-year books of accounts shows current assets (cash and securities easily convertible to cash) fall short of current liabilities.

Complex decisions

Kenya’s regulators confirmed that some listed companies are indeed facing financial difficulties but remained non-committal on the nature of enforcement mechanisms to be deployed.

“The liquidity issues are of course very serious but note that decisions of this nature are complex and require consultations with various stakeholders including the issuer, regulator and other government agencies,” said Geoffrey Odundo, chief executive Nairobi Securities Exchange.

“We don’t comment on our enforcement actions to the press. We regularly assess the issuers’ eligibility standards and when we find that there is a problem, we engage with them,” said Paul Muthaura, acting chief executive Capital Markets Authority Kenya.

Sources said the gaps in Kenya’s Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulations, 2002 make it difficult for regulators to punish non-compliance with working capital ratios.

The NSE listing requirements stipulate that an issuer must have adequate working capital and must not be insolvent, depending on the nature of the business.

According to Mr Odundo, a negative working capital is a preliminary sign that a company might struggle to meet its short-term obligations thereby affecting an investor’s perception of a company, but argues that “it is always prudent for investors to look at other indicators such as corporate governance structures.”

“While assessing an issuer’s performance and financial position, investors need to consider mitigating measures on this risks such as the assets base of a company and the ability of a company to realize its non- cash generating assets in the short term,” he said.

Advertisement