Kenya’s Capital Markets Authority has put on a watchlist a number of listed companies that are facing liquidity and corporate governance issues, with the possibility of suspending and eventually delisting them from trading.
The EastAfrican has learnt that at least eight firms listed on the Nairobi Securities Exchange are facing liquidity and corporate governance challenges that have seen their earnings drop significantly. The share prices of some firms has fallen below the par value, putting investors’ wealth at risk.
Some firms have even dropped into negative working capital territory, where their short-term assets are not adequate to cover short-term liabilities when they fall due, making it difficult to finance their day-to-day operations.
The CMA did not give the list of the affected firms but The EastAfrican understands that among them are cement maker Athi River Mining, Uchumi Supermarkets and Mumias Sugar Company.
“The authority is closely tracking the performance of these companies and is engaging the majority shareholders and the government where it has significant interest, in order to get a clear path to protect their interests,” CMA chief executive Paul Muthaura said.
“The process is ongoing and we will inform the public and the shareholders once we get a clear path.”
Our attempt to get a comment from the NSE on the action it has taken on these companies were unsuccessful, as chief executive Geoffrey Odundo had not responded to our inquiries by press time.
Analysts say investors are losing appetite for the stocks of these companies due to their weak fundamentals and a lack of clear plans on how they intend to turn around their fortunes.
“We are seeing an underlying investor fatigue with these companies such that even the share of volumes traded within the NSE are considerably lower than historically. What is not clear is the strategy these companies have put in place to address the issues that have caused the current situation,” said a senior analyst at Alpha Africa Asset Managers Daniel Kuyoh.
Mr Kuyoh added: “When they are clear with their turnaround plans and the plans begin to bear fruit then it will possibly change the company and investor prospects.”
The development is likely to further dent investor confidence on East Africa’s largest stockmarket, which is struggling to attract new listings.
Kenya has 67 listed firms of which three — Marshall East Africa Ltd, Hutchings Biemer and A. Baumann — have been delisted while one, Atlas Africa Industries Ltd, has been suspended from trading.
The CMA has developed new rules to govern the suspension and eventual delisting of companies that flout listing regulations, but these rules are yet to be enforced.
The new regulations were drafted in 2015, in response to concerns over the increasing number of companies that are sliding into negative working capital territory, undermining investor confidence in stock trading.
The regulations stipulate that companies that break listing rules be suspended for six months before being delisted, and the regulator will have powers to protect the interest of the investors pending review of the case.
In addition, companies and their directors forced to delist from the NSE 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 positive working capital owing to the nature of their business, where short-term assets are matched with long-term liabilities.
Manufacturing companies will be required to maintain positive working capital at all times, failure to which sanctions will be imposed including a penalty of Ksh10 million ($100,000).
The policy framework dated June 2015, borrows heavily from countries and exchanges such as India, Singapore, Nasdaq, and the New York Stock Exchange, all of which have comprehensive delisting rules and procedures for both voluntary and mandatory delisting while Kenya only has rules and procedures for voluntary delisting.
Last year, market intermediaries such as investment banks and stockbrokerage firms posted losses and reduced profitability due to a prolonged drought of lucrative corporate deals such as initial public offerings and rights issues, coupled with the slow recovery of the stockmarket, after a prolonged political environment and the effects of the interest rate caps.
The firms recorded reduced or marginal growth in brokerage commissions and consultancy fees, their key sources of income, signaling the poor performance of the equity market in 2017.
NSE suffered an IPO drought, with none in 2016 and 2017 while only two rights issues (Longhorn and KenGen) were executed in 2016, with none in 2017.
“Kenyans are not keen on the stockmarket. Many companies are trading below their book value while issuers will only bring companies on the market if they are sure the shares will be taken up because they don’t want to fail,” said executive director in charge of corporate finance at Standard Investment Bank Job Kihumba.
“Many retail investors have left the stockmarket and gone to alternative investments such as land which is now a major competitor. The stockmarket is now being driven largely by foreigners.”