CMA dangles incentives to push for more listings at city bourse

Barclays Bank CEO Jeremy Awori (right) with Nairobi Securities Exchange CEO Geoffrey Odundo Nairobi Securities Exchange (NSE) Charity Trading Day in Nairobi on November 10 2017. (David Njaaga, Standard)

If there are nostalgic moments that Nairobi Securities Exchange (NSE) would want to re-live, its Chief Executive Officer Geoffrey Odundo says would be the entry of attractive firms such as Kenya Electricity Generating Company (KenGen) and Safaricom.

These can hugely boost the bourse. KenGen‘s initial public offering (IPO) in 2006 opened a floodgate of retail investors when it offered 658.9 million ordinary shares at Sh11.90 each.

The share jumped to a record high of Sh49 on just the first day of trading, exciting investors to a 333 per cent over-subscription level.

Eveready’s fortune may have dimmed for now but it still holds the record oversubscription rate of 830 per cent.

From an issue price of Sh9.50 in 2006, the share is now averaging Sh2.35 being four times lower than its IPO price.

Key IPOs such as Kenya Airways, KenGen, Cooperative Bank and Safaricom following the wave of privatisation from government lifted the profile of the NSE.

It is moments, Capital Markets Authority (CMA) Director of Policy and Regulation Luke Ombara also wishes could come back. “We used to benefit from privatisation but it is now slow. If we can get three of the calibre of Safaricom, it can excite the market,” says Mr Ombara.

Safaricom shares run the show on the NSE with a market capitalisation that accounts for more than 40 per cent of investors’ wealth on NSE. 

Lately, the IPO drought has gripped the market.

There has been none on the bourse since October 2015, when Stanlib Fahari Reit went public.

This brings to life memories of the period between September 2011 to September 2014 when there were only two offerings — Britam and NSE Ltd.

CMA is proposing a raft of measures which it believes will revitalise Nairobin bourse. It is betting on policy proposals it wants to present to National Treasury to help woo more firms to the NSE.

Mr Ombara says that since 1995 when it started submitting proposals to Treasury on annual basis, at least 40 per cent have been successful each year.

“Anytime we come up with new proposals, Treasury wants us to prove quantitatively what previous incentives have translated to,” he says, armed with data.

While some of the granted incentives have had a notable impact, CMA reckons that others have had little or no impact. 

Currently, there are 64 listed companies with 27 new listings having happened from 1995.

However, there have been seven de-listings over the same period. CMA is looking at winning Treasury’s heart to grant corporate tax treatment across all market segments of the NSE including the Growth Enterprise Market Segment (Gems) which is yet to excite many firms.

Currently, only firms listing by offering at least 30 per cent of their stake in IPO or those listing by introduction enjoy 25 per cent tax rate instead of the universal corporate tax rate of 30 per cent.

The tax incentive does not extend to operating subsidiaries of the listed company.

CMA wants the benefit extended to subsidiaries of the listed firm provided they are operating in Kenya.

CMA feels that if an attractive rate, based on the number of shares issued to the public, is also granted to firms listing under Growth Enterprise Market Segment (Gems) will see more listings.

Currently, Gems has only attracted five companies since 2013 as opposed to CMA’s target of three to five per year.

Even so, the five - Home Afrika, Flame Tree Group, Kurwitu Ventures, Nairobi Business Ventures and Atlas Development have had a dismal run.

According to Ombara, family-owned businesses have been afraid of scrutiny and ceding part of their ownership, opting to stay away from the bourse.

Lydiah Kinyanjui, a senior officer for strategy and policy at CMA says that the regulator will be proposing to Treasury not to punish firms’ past tax sins upon listing. “We want to see if there is a possibility for Treasury to provide for a tax amnesty on past omitted income, provided that the companies make full disclosure of their assets and liabilities and commit to pay future taxes.

Listing on the bourse means more scrutiny and transparency since financial statements will be prepared and made public.

Pointing fingers

For the already listed firms on the Gems, many are trading below the par value.

CMA is citing among other challenges, incidences of incorrect valuation at the time of listing.

“Nominated advisors have been doing the valuation and we have had issues, especially on shares dropping below par value after listing. Part of the strategy will be to examine how to improve quality of valuation,” says Mr Ombara.

CMA is looking at a possibility of coming up with detailed valuation methodology for pricing of securities within the regulatory framework or leaving it to be undertaken by valuers recognised by International Valuation Standards Council.

CMA thinks that many companies who may want to join the bourse through Gems think that it is only meant for SMEs.

Mr Ombara says the regulator will be running more marketing to sell the market as growth segment as opposed to being for small firms. For many companies, CMA says, the cost of listing has also been a barrier.

It is looking at a possibility of reducing or removing the upfront listing fee requirement to lure new listings. And for those firms who want to enter the bond market, cost factor has also been a barrier.

The regulator is reaching out to Treasury with two proposals: zero-rate credit rating costs or charge a small amount to the issuers progressively throughout the bond’s tenure.

Currently, the securities market regulator only recognises three credit rating agencies: Metropol Corporation, Global Credit Rating Company and Agusto & Company Ltd.

Operating expenses

To stimulate the bond market, CMA is proposing that the income tax Act is amended to allow deduction of interest and other operating expenses incurred by financial institutions on income earned from infrastructure bonds. And with betting firms posing a competition to the capital markets by redirecting some of the money away from the bourse, CMA is seeking a way to co-exist with them.

According to Mr Ombara, CMA will be proposing to Treasury, offering tax incentive to winners who invest their money in equities and bonds

“We are looking at the likelihood that as a result of winning a bet, rather than being paid in cash, the betting company will assist in mobilising savings by investing for you in shares or bonds.”

[email protected]