The Nairobi Securities Exchange (NSE) should have powers to approve capital raising activities by companies listed on the Growth and Enterprise Market Segment (Gems), a consultant hired by the Capital Markets Authority (CMA) has recommended.
Genesis Analytics, which was contracted to look into ways of increasing listings on the Gems, said the current structure was rigid, slow and uncertain.
Firms are required to get approval from both the CMA and NSE, which charge application fees, before being listed.
The consultants reckon that having the NSE vet public offers would cut the time taken and costs involved in the approvals.
The CMA teamed up with the NSE and Financial Sector Deepening Trust Kenya — an NGO working on financial inclusion — to commission Genesis Analytics to come up with the recommendations.
“Giving the NSE the authority to approve public offers would reduce the time, risk and cost of public offers and encourage their greater use,” said the consultants adding that this was a common practice for second-tier markets in other jurisdictions.
Luke Ombara, acting director regulatory policy and strategy at CMA, said the regulator would not be opposed to NSE approving listing by introduction, which requires less scrutiny than public offers, so long as the exchange improves is self-regulatory policies.
Only four companies are listed on the Gems, two years after its introduction, with three of them having entered the market in the last quarter of 2014.
The segment was expected to attract medium-sized firms which had previously been locked out by the stringent rules associated with listing on the main and alternative market segments.
Stephen Wells, of Genesis Analytics, said companies listed on the Gems opted to conduct private placements before listing because of the stringent and lengthy process involved in capital markets.
Flame Tree Group and Atlas Development which listed last year conducted private placements before coming to market where they listed through introduction which does not inject cash in the company.
The consultants also noted that there were not enough tax incentives to attract firms to the segment.
Potential companies fear listing would expose them to backdated claims from Kenya Revenue Authority based on regulatory financial disclosures they file.
Genesis Analytics recommended that KRA clarifies tax amnesty offered to companies that issued their shareholding to the public.
Companies that opt to sell less than 30 per cent of their shareholding to the public should also qualify for tax waiver, said the consultancy.
Listing companies are charged a corporate tax of 20 per cent for five years after listing compared to the usual 30 per cent.
Companies listing on the Gems, however, have the option of listing as low as 15 per cent of their ownership locking them from the tax incentive.
The low listing threshold is meant to encourage family-owned businesses to list without fear of losing control of the entity.
The consultants also blamed poor share pricing during introduction for huge price drops and illiquidity in the Gems market.
They recommended an auction process be used to determine the price of the share and more stringent qualification be set for companies that qualify as market advisers.
“It would be better if the initial price were to be determined by an auction or similar process so that companies’ opening prices were not to be followed by immediate declines,” said Genesis Analytics.
Shares of shariah-compliant investment firm, Kurwitu, which is the priciest in the stock market at Sh1,500, are yet to trade this year.
Low liquidity on the segment has resulted in the counters missing out on the price rally witnessed at the market since mid-last year.