As part of the broader economic strategy of attaining sustainable growth, Kenya aspires to attain 10 percent average annual economic growth by the year 2030.
Critical to this high-level growth is the creation of a vibrant and globally competitive efficient and effective financial services sector aimed at promoting high savings levels to fund the country’s overall investment needs; including the Big 4 Agenda.
Cognizant of the significant role of the financial sector in the attainment of this vision, the government adopted a 10-Year Capital Markets Master Plan in 2014. The plan provides a road map for implementing crosscutting financial sector reform strategies, setting the stage for Kenya to upgrade its capital market from a Frontier Market to Morgan Stanley Capital Index Emerging Market status by 2023.
The development of the growth enterprise market segment (GEMS) at the Nairobi Securities Exchange (NSE) has been identified in the plan as a key avenue for improving market liquidity and increasing listings at the bourse. Launched in 2013, GEMs was established to provide a platform for companies that wish to grow to raise capital or to diversify their ownership structure and unlock value through more favourable listing requirements.
GEMS offers numerous incentives to attract companies to come to market. Some of the incentives offered include: tax incentives, fee incentives, more flexible admission criteria and a reduction in the minimum free float requirement to 15 per cent of issued share capital. This allows companies to incrementally release control in their companies as they grow and evolve.
This notwithstanding, GEMS has attracted limited listings, with firms perceiving it as a small medium enterprises (SME) segment. Fundamentally, GEMS aims at accommodating both the SMEs and venture companies without an existing track record but with positive growth projections to realise growth prospects while scaling up their operations. According to a joint study by Financial Sector Deepening (FSD) Kenya, the Capital Markets Authority (CMA) and the NSE done in 2015 on the growth of GEMS, the challenges cited for low listings in the segment include the view that SMEs’s financial statements, since they are the basis for taxation, may not fully represent the true financial state of the firm. More complete accounts upon listing, would lead to a higher burden in the future and, of significant concern to companies would be the risk of reappraisal of past tax payments.
It is worth noting that in the recent 2019/2020 Budget Statement the government has provided an amnesty on tax penalties and interest on any outstanding tax for a period of two years prior to the listing, for SMEs that list under the GEMS programme, a move aimed at tackling this established concern.
As GEMS reflects the supply of future Main Board listed companies, the 10-Year Master Plan set a target of three to four new listings annually. However, despite the numerous incentives offered under GEMS the segment has been utilised sub-optimally.
To address this, the CMA has devoted considerable effort to enhance awareness of the opportunities. While the eligibility requirements for GEMS listing are less onerous than the AIMS and MIMS, there is greater emphasis on corporate governance to enhance investor protection and confidence. Companies are therefore required to have a high level of corporate governance and ensure that internal controls and risk management is commensurate to their size of operations.
Additionally, the CMA has fostered collaborative efforts with the NSE that led to the establishment of the non-trading incubation and acceleration board dubbed ‘Ibuka’. The Ibuka platform is a medium-term self-driven listings pipeline development programme designed for aspirational organisations with a firm commitment to embrace impactful changes that enhance their growth.
The incubator and accelerator programme seeks to host corporate entities that require improved corporate structure formation, enhanced capability to access capital markets and a roadmap to long-term corporate sustainability.
Following successful hosting on the NSE’s Ibuka platform, companies will be encouraged to eventually migrate onto other trading market segments, including GEMS and the Main Board as they mature and evolve into national and regional champions of excellence in their target area. As at June 14, 2019, 12 firms had been hosted on this platform.
Similarly, the benefits of tapping the capital markets are numerous. These include improved corporate governance and financial reporting, which eases not only tax compliance but also better equips the entities to raise sustainable capital for growth and diversification thereby strengthening their capacity as key drivers of economic growth.
As more elaborate strategies, including proper valuations and pricing, are put in place and activities within the GEMS market are successfully implemented, this is expected to foster growth of the GEMS-listed companies, translating to high trading volumes and increased foreign direct investments, ultimately pushing capital market activity to the next level.
Proper valuations at the point of entry to the market will not only benefit companies post-listing but will also provide attractive exit arrangements to private equity firms.
GEMS is therefore a key staging post in growing the capital markets and essentially promoting economic growth and development. Once firms join the GEMS platform they can easily graduate to other trading platforms, translating to increased market activity and performance.
Awino is Strategy & Policy Officer at the Capital Markets Authority.