Capital Markets Authority wants to tighten the process of valuing shares of firms interested in listing on the bourse to root out misleading valuations.
CMA Director for Regulatory Policy and Strategy Luke Ombara said the current regulatory framework on pricing of shares prior to listing is not sufficient to ensure that companies give investors the correct price.
“What we have in the regulatory framework currently is a requirement that firms do a valuation, but it does not specify the methodology. Firms can still tell us the methodology they use, but that is not sufficient in determining whether it was correct or if it is internationally accepted,” said Mr Ombara at a press briefing on Friday.
He acknowledged that even though the movements in share prices once a company has been listed is a function of demand and supply, there are cases where prices go way below the Initial Public Offer (IPO) price, which could be as a result of valuation.
The scenario has been witnessed in both the main investment market and Growth Enterprise Market Segment (GEMs), causing loss and anxiety to investors.
When share prices drift below IPO price, they lead to negative returns to investors. Currently, out of the 12 companies that launched their IPOs on the Nairobi Securities Exchange (NSE) between 2000 and last year, four are trading below IPO price, one has been delisted while another has stopped trading altogether, pending completion of the deregistration process.
This has seen the market run into IPO drought as the latest additional offers and listings fail to excite investors like was the case in the bourse’s hay days when most IPOs were oversubscribed, giving companies an easy time to raise capital.
To save investors from the possibility of firms overpricing their shares above market value, CMA now wants to tighten the process of determining the pre-listing price.
Mr Ombara said the regulator has opened discussions with all market stakeholders to find the correct approach to follow in getting a favourable price for investors, with two options on the table.
“We will look at whether it is possible to come up with detailed valuation methodology for pricing of securities within the regulatory framework or if we will require that valuation be undertaken by a valuer that is recognised as a member of International Valuation Standards Council,” he said.