Kenya is working on rules to tighten controls on the trading of shares of private companies over the counter — where companies opt to list at the Nairobi Securities Exchange without selling new shares.
Negotiated prices obtained on the unregulated over the counter (OTC) market inform the opening price when the company chooses to go public through listing by introduction. This has now trumped initial public offerings as the preferred route for earning the corporate clout that comes with being a quoted company.
Analysts say the OTC market can under the existing system be manipulated ahead of a listing by introduction, by existing shareholders inflating a company’s worth. Regulators now want to rule out this possibility.
“What companies are doing is that they raise capital from targeted equity investors through private placement and then come to the market to list those existing shares in order to provide these investors with an exit route. But the prices at which these shares are trading in the OTC market are set by the companies themselves,” a market player who sought anonymity told The EastAfrican.
In contrast, listing through an IPOs requires rigorous scrutiny of a company’s performance in the previous five years, the sector of operation and prospects in the medium term to determine the valuation of the shares. This requires significant spending on consultants to prepare the prospectus for approval, listing through IPOs at twice as more expensive than that of entering the market by introduction.
The pricing and the cost of placement have seen only 11 flotations between 2000 and 2016, which raised $689 million.
Since listing by introduction was allowed to increase the number of securities available to investors, there have been 11 introductions, starting with that by Equity Bank in 2006. Other such listings are CfC Insurance Holdings, TransCentury, Longhorn Publishers, CIC Insurance and Home Afrika Ltd.
Kenya’s last IPO was in 2014 when the NSE went public by floating 66 million new shares. The IPO of the Stanlib I-Reit last year represents more of a special purpose vehicle than a new company coming to the bourse.
In the past three years, there have been four listings by introduction — by Flame Tree, Kurwitu, Nairobi Business Ventures and fashion retailer Deacons East Africa, which listed 124 million shares last week.
To level the playing field, the Capital Market Authority (CMA) has procured consultants from the World Bank to develop rules to regulate the OTC market. Their findings will help govern the trading of bonds and equity away from the bourse.
“Currently, we don’t have control over the OTC market, but we are trying to come up with an approved regulatory framework for it,” an industry source privy to the matter said.
IPOs an unattractive exit
The regulator is understood to have been working on the guidelines for a year and is on the verge of drafting a framework pending input from stakeholders.
“This could take a bit of time because we have many issues to agree upon with the stakeholders,” the source added. CMA chief executive Paul Muthaura was not immediately available for comment.
Analysts argued that companies have also turned to listing existing shares to escape the stringent regulatory approvals and take advantage of the lower costs of listing, which exclude underwriting, marketing, placement and advisory costs.
Companies listing by introduction are also exempted from the Ksh30 million ($300,000) approval fee paid by companies seeking to raise additional capital through IPOs, rights issues or corporate bonds, regardless of the value of the transaction.
“It is actually cheaper for an organisation to list by way of introduction than an IPO. Listing by introduction also takes a much shorter time than the IPO,” said Daniel Kuyoh, a senior investment analyst at Alpha Africa asset managers.
According to Mr Kuyoh, listing existing shares gives the current shareholders an opportunity to exit the holding company without diluting the remaining shareholders.
With an IPO, the existing shareholders are forced to buy the new shares on offer to avoid being diluted. A study by consultancy firm Deloitte East Africa showed that many private equity funds find IPOs an unattractive exit route because they are expensive and bureaucratic.
“Listing by way of introduction is cheaper and less stringent in terms of regulatory approvals than the IPO because you are not going to the public to ask for money,” said Paul Mwai, chief executive of AIB Capital Ltd.
“When the market is not vibrant and you are not sure if the IPO will be successful, then you can list the existing shares,” he added.
Cost of raising capital on the NSE
NSE chief executive Geoffrey Odundo said fiscal incentives including the reduction of corporate tax for listed companies from 30 per cent to 25 per cent during the 2014/2015 financial year have enticed companies to list by way of introduction.
Early this year Kenya reduced the cost of raising capital on the NSE to improve competitiveness, attract more companies and transform the country into a regional financial hub.
The National Treasury gazetted a new fee structure that capped approval fees forcapital raising programmes by companies at Ksh30 million ($300,000) from a variable charge of 0.15 per cent that was previously based on the value of the transaction.
In the UK, listing by way of introduction is allowed for companies in which at least 25 per cent of the shares are in public hands. Chicago-based legal advisory services provider Baker&McKenzie Africa said regional integration would enhance the potential for IPOs by increasing demand for capital market instruments.
According to PricewaterhouseCoopers (PwC) capital raised from IPOs by companies on the Johannesburg stock Exchange (JSE) fell 11 per cent in 2015 largely impacted by the weakening of the South African Rand.
On the other hand capital raised from other African exchanges through IPOs increased by three per cent.