Why retail investors have shunned NSE's alternative market segment
By Frankline Sunday | August 1st 2021
When the Nairobi Securities Exchange (NSE) launched the Growth and Enterprise Segment (GEMS) in 2013, there was optimism across the board that this would be the major instrument to unlock a years’ long drought of listings at East Africa’s largest bourse.
With reduced eligibility criteria including the Sh10 million minimum paid-up capital compared to Sh50 million for the main market segments, tax breaks and no demand on profitability records, the GEMS offered smaller firms a clear path to list on the capital markets.
“We would like to see as many Kenyan businesses as possible, and there are many, share their businesses with their fellow Kenyans,” said Mugo Kibati, then director-general of Vision 2030.
“Come and list. This is why we have introduces GEMS so that we can give you an alternative, less onerous, less stringent avenue to share your wealth, business and ideas with your fellow Kenyans,” he said.
Kibati, who now heads Telkom Kenya, was then speaking at the official listing of Home Afrika, the first firm to list at the GEMS in 2013.
The event was billed as a milestone in Kenya’s capital markets history.
Home Afrika listed 405 million shares at the introductory price of Sh12 per share, valuing the real estate company at more than Sh4.8 billion.
Today, Home Afrika’s shares have plummeted.
They traded at Sh0.44 as at the close of trading Friday, giving the company a Sh1.6 billion valuation.
This means that in the past seven years, the company has lost more than Sh3.2 billion of its book value.
The company’s trend at the bourse has become a cautious bellwether for the GEMS - raising questions as to why both investors and eligible companies are shying away from participating in this market segment.
A report commissioned by the Capital Markets Authority (CMA) NSE and FSD Kenya found that despite the reduced entry criteria in the GEMS, companies looking to list still encounter various roadblocks that could explain the apathy.
According to the report, small companies that had significantly thought about listing at the GEMS suggested that need to raise the company’s profile and obtain growth capital as the most important drivers of their decision.
“Raising the profile of the business was actually the most commonly reported reason for accessing GEMS and the NSE in general,” states the report.
“Senior stakeholders of small and medium enterprises (SMEs) spanning a variety of sectors all indicated that listing was seen as a mark of graduation, that their company had arrived, and that by listing it was joining “the big league,” stated the report.
However, the report suggests a lack of adequate awareness and understanding of the workings of the capital markets by prospective SMEs before and, for those lucky, after the listing process.
“In other markets, companies are influenced in their decision by the marketing efforts of the exchange and by the marketing activities of advisors, intermediaries and third parties that have an interest in developing capital markets like the regulator,” stated the report.
None of these reasons seemed important to Kenyan SMEs and this, coupled with an inadequate capacity for advisory services experienced by some SMEs dims their prospects to list.
Once a company has decided to list at the bourse, they are required to appoint a nominated advisor to guide the company through the NSEs listing requirements and pass all the regulatory checks.
Companies on the GEMS are further required to retain their nominated advisors (Nomads) throughout the entire listing period at the bourse.
According to the report, there are 24 Nomads at the NSE, about half of which are licensed brokers and their quality of work varies widely.
Companies are said to see little value in their services or the requirement for long-term relationships.
“Accordingly, companies have a transactional approach to advisors and price is probably the largest determinant - a tough negotiation between the advisor and the company on fees charged is the norm,” explains the report.
This is important because nominated advisors are the link between companies and the bourse and play key roles in the listing process, including bringing on board the initial pool of early investors and in setting the IPO price.
This means that companies with big budgets to spare for advisory services can afford to hire the leading advisory firms in town, with the rest largely left to fend for themselves - explaining the reluctance by some firms to appoint them.
Another challenge that keeps off retail investors from participating in the GEMS even when companies do list is the relative tight liquidity in the market segment.
Only 15 per cent free-float is required for listing at the GEMS and companies first issue private placements to a handful of individual investors before market introduction which affects the eventual pricing of the counter.
“The first listing on GEMs suffered severe price falls which have mainly been attributed to incorrect pricing when the company was introduced to the market,” explains the report.
“The opening price on the first day of trading appears to be largely arbitrary and driven by factors other than the level of market supply and demand at the time,” explained the report.
In June 2016, the Nairobi Business Ventures, (NBV) a local shoe and leather accessories retailer listed by introduction at the GEMs.
The firm which operated several chain stores in Nairobi’s central business district (CBD) under the brand name KShoe floated 23.6 million shares at Sh5 per share - giving it a Sh118 million valuation.
The listing came after a private placement where 26 shareholders raised Sh28 million in the capital.
In November last year, the company underwent a restructuring process including a share split.
Dubai-based Delta International FEZ, a subsidiary of the Al Siraj Holdings conglomerate put in Sh83 million, snapping up the majority stake in NBV.
The NSE, FSD and CMA recommend more stringent regulation of Nomads - including increased oversight of the pricing for initial offers.
“It would be better if the initial price were to be determined by an auction process or similar so that companies’ opening prices were not to be followed by immediate declines.”
The report further recommended a move towards more public offers as opposed to having private placements followed by introductions as they strongly influence the opening price which is prohibitive for the bulk of retail investors.
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