Kenya plans a special trading platform for troubled listed firms as it emerges that immediate delisting of such firms could create a crisis of confidence in the capital markets and send the wrong signal to potential investors.
The EastAfrican has learnt that the Capital Markets Authority has proposed an amendment to the Nairobi Securities Exchange listing and trading rules with a plan to introduce a Recovery Board where financially distressed firms would be rehabilitated for two to three years to help them get back to even footing.
The proposed board, the first of its kind in East Africa, will also be anchored in the Capital Markets Act and the affected firms would be required to furnish the authority with a turnaround plan.
Failure by the rehabilitated firms to recover within this period would eventually lead to delisting from the exchange as the last resort.
“The Authority is working with the Treasury and the NSE to establish a new Recovery Board to which any company not meeting minimum listing criteria will be automatically moved to raise investor awareness of their area of non-compliance and also to fix a firm timeline within which they must remedy the non-compliance or be automatically delisted,” CMA chief executive Paul Muthaura told The EastAfrican.
The proposed Recovery Board will have distinct rules and regulations including eligibility criteria, continuing reporting requirements, and periodic submissions to the regulator.
Investors trading in firms that have been pushed into the Recovery Board would be advised to trade with caution, fully aware that they are dealing with firms in trouble.
Globally, Hong Kong and India have introduced similar arrangements of recovery boards to put listed firms that do not fit the requirements of the main board to ensure key investor protection measures are maintained.
If successful, Kenya’s Recovery Board could attract several firms on the NSE that are currently facing liquidity and corporate governance challenges.
Several firms listed on the NSE have flouted various listing requirements, with some being technically insolvent.
When contacted for comment, NSE chief executive Geoffrey Odundo acknowledged that some listed companies are technically insolvent although their shares are still trading on the exchange to prevent investor confidence from being eroded.
“Yes, the bourse is aware of the situation and has a continuing engagement with the affected companies to assess their individual position,” said Odundo.
Kenya has 67 listed firms, of which three (Marshall East Africa Ltd, Hutchings Biemer and A. Baumann) have been delisted while Atlas Africa Industries Ltd has been suspended from trading.
“The authority is closely tracking the performance of these different companies and is engaging the majority shareholders where there is significant government interests, in order to get a clear path to protect the interest of the shareholders,” said Muthaura.
Kenya’s stockmarket is on the downward trend which saw 12 firms issue a profit warning in 2017 compared with 11 in 2016.
During the second quarter (April-June) of this year equity turnover at the NSE declined 23 per cent to Ksh47.14 billion ($471.4 million) from Ksh61.15 billion ($611.5 million) in the previous quarter (January-March).
Market capitalisation also dropped by 8.6 per cent to Ksh2.57 trillion ($25.7 billion) partially attributed to profit taking by investors in well-performing blue-chip companies.
According to CMA, the decline in performance of the bourse could be attributed to the drop in equity prices and traded volumes for key counters.