Kenyan companies will be able to sell their shares in other countries without cross-listing after the issuance of regulations on Global Depository Receipts by the Capital Markets Authority (CMA) that have also opened the door for short selling.
International companies will also be able to sell their shares in Kenya without listing on the Nairobi Securities Exchange (NSE) through the new product introduced by the regulator.
Depository receipts are tradable certificates issued in one country representing shareholding in a company listed in another.
Corporate bonds can also be traded under the same arrangement in what is called depository notes.
“As part of the initiatives towards development of the capital markets, the Authority is in the final stages of developing a Guidance Note on Global Depository Receipts and Notes to promote diversity of capital markets products,” said the CMA in a statement.
Savvy investors will also be able to sell borrowed shares in the hope of a future price drop that will allow them to buy back the same stock at a profit, a process called short selling.
Short selling will only be carried out by regulated persons, as per draft regulations released by the CMA for public debate.
The regulations also cover securities lending and borrowing, which allows an investor to raise an amount equivalent to the value of their shares at a fee without actually giving up ownership.
“This is intended to increase overall market liquidity and flexibility of financing by increasing the volume of securities potentially available for trading and further increases depth and efficiency in the capital markets through price discovery,” said CMA.
Securities lending and borrowing are an alternative source of financing for companies and high-net worth individuals undergoing short-term cash strain, but who are not ready to part with their security holding.
Raising of finances has been a major headache in the country due to previously high interest rates charged by commercial banks and stringent collateral requirements.
Cross listing has been a headache for Kenyan companies due to the strenuous process involved and inactivity in other regional markets.
The CMA proposes depository banks be mandated to buy back receipts of investors who are not able to get buyers of their securities in the open market.
“If they do not get a ready buyer, they may require the depository to cancel held Depositary securities and request the bank to deliver a proportionate number of the underlying securities to their account (or pay a cash equivalent) to them,” read the regulations.