Eyes on CMA as Nairobi bourse remains shaky

With four counters suspended and more companies leaving the Nairobi Securities Exchange(NSE) than those joining, poor off-take of new products and a market so concentrated that one company matches the value of all the other 60 companies, Kenya’s capital market is in a sorry state.

The bond market has been ripped by scandals after investors lost their money in collapsed issuers and is now mostly trading government treasuries, having shrunk from 28 listings valued Sh71.28 billion in August 2014 to a Sh22.1 billion portfolio issued by six firms.

Then in early 2020 the coronavirus pandemic hit stock prices, which fell with foreign investors exiting, sending the bourse to a multi-year low.

Perhaps as a testament to its resolve amid the crisis, the Capital Markets Authority (CMA) has returned to the drawing board and now wants to review its 10-year master plan and hopefully reinvigorate the market.

The regulator’s chief executive Wycliffe Shamia — who took office just as Covid-19 hit — says it [master plan] has only attained 54 per cent of its targets and has now hired a consultant to ensure that the roadmap delivers its aspirations.

The plan has received the backing of the National Treasury.

Mr Shamia who replaced Paul Muthaura served in acting capacity for a year after delays in completing the recruitment and was only confirmed last November.

The biggest challenge CMA faces is the low uptake of products, a listing drought and low performance by companies at the NSE that has left it reliant on only five top firms.

Since the NSE itself listed through an IPO seven years ago, the bourse has only welcomed listings by introduction of a few small firms which have performed poorly under the Growth and Enterprise Market Segment (Gems) and Bank of Kigali’s cross listing.

During that period, it has suspended Deacons, Kenya Airways, ARM Cement, National Bank and briefly Nairobi Business Venture; and lost Kenol Kobil, Marshals East Africa, Atlas, African Lakes Corporation (Africa Online) and Unilever, all of which have shaken investor confidence.

It has not helped that a real estate investment trust, Asset Backed Securities and an exchange-traded fund have reported dismal uptake.

“You see, for many years there has been a feeling in the market that we are operating on different pitches, one is very green and the other very dry. It is as if the CMA is running too fast leaving the market behind,” says the chief executive.

But market analysts believe the greatest hurdle in the regulator’s market growth path has been lack of awareness and knowledge of the investors who were supposed to drive uptake.

They say CMA as well as other market stakeholders have to embark on a comprehensive awareness programme targeted at enhancing literacy on the capital markets and the various opportunity accrued to its participants.

“I believe the strategy was not wrong, but the way CMA approached, they might have missed a few steps in the development cycle. Any new product has to address a need in the market and with 70 per cent of the market controlled by foreigners, any product launched should appeal to them,” Susan Makena, an Investment Research Analyst at Sterling Capital says.

Market realities

EFG Hermes Director - Frontier Equity Sales & Head of Equities Kenya, Muathi Kilonzo is of the view that trustees of public pension funds who allocate money to institutional investors and dictate the mandate have yet to widen their scope and risk appetite to these new products.

The regulator appears to be reading from the same script as the analysts, noting that the key to unlocking the market is talking to players to understand their needs and getting more listings by changing the legal framework to relate to market realities.

The legal framework that was put up in early 2000, it notes, was looking at large companies, the public offers and disclosure regulations. In the review, the CMA now wants look at small companies, county governments and limited liability partnerships.

“It is not that we do not consult whenever we come up with a new policy. We usually consult, sometimes they even complain that we call them too many times that they have no time to work. Still, when we introduce new products we see the listings are a bit low, we are concerned. We feel the market does not understand where we are,” explains Mr Shamia.

Besides the dearth of listings, liquidity has also been a big issue at the bourse where just a few counters are active, controlling over 70 per cent of the entire market.

CMA says the new strategy will focus on getting more SMEs to issue securities and raise cheap money for business without the pressures of short-term repayment.

“In our strategy we also want to review the demand side. We need pension funds and insurance companies to come in strongly.”

“You see, bank funding has pressure to service the loans, but if we bring in more people to facilitate capital raising and widen the basket to get to raise even Sh1 million, we offer SMEs cheaper funds which can be paid over longer periods or even as equity,” the CMA boss adds.

But despite this grand plan for small businesses, their performance has not been as encouraging.

Gems recently welcomed HomeBoyz entertainment, a family run media company heavily reliant on one customer; the government with Kenya Revenue Authority and State House as their top two clients.

Gems other players have been weak, tripping over minor incidents as portrayed by Atlas which went south after a foray in Ethiopia and NBV whose shoe retailing business collapsed forcing its restructuring and change of business to cement manufacturing and other industrial undertakings.

“There were some problems with the quality of companies that eventually listed in that segment. Additionally markets like Gems, which incubate and grow small companies rely on an active retail investor base, which has been largely absent,” notes Mr Kilonzo.

CMA says the market for small companies was a good idea, observing that even London Stocks Exchange, for the longest time the global financial hub, has an alternative market to support smaller businesses with reasonable listing requirements.

The regulator reckons that the Nairobi bourse was just unlucky to get a string of disappointments, but it has taken lessons to better regulate that market.

“We were unlucky that for companies that listed, their businesses did not work well which in turn affected how people viewed listings. We did not get the right companies at Gems and they may have sent out the wrong signal,” Mr Shamia says.

“We are learning from our mistakes. Some people say that one shoe does not fit all and we need less regulations for smaller businesses to make listing easy. Others say relaxing some rules will expose the businesses to some corporate governance issues, or they may not get the level of board variety and strategy.”

due dilligence

CMA also has its work cut out in making the corporate bond market appealing to investors once again following the damage done by the collapse of Imperial and Chase Bank issues.

“The corporate bond market has suffered because of poor due diligence (leading to lack of timely detection of malpractices) and a lack of enforcement action administered against directors who fail to conduct their governance duties. To gain the trust of investors, there should be an implementation framework that involves early detection, swift investigations and ultimately, administration of criminal or civil proceedings,” Ms Makena said.

With liquidity concentrated in the secondary bond marker, the CMA says it is talking to fund managers and insurance companies arguing that while it is reasonable not to put their money in assets they consider unsafe because people lost their hard earned money, diverting all the cash to government paper is not a long- term solution.

Analysts also argue that CMA should look at requirements in the regulatory framework such as the debt ratios, minimum number of shareholders and capital requirements which have been a limiting factor for companies to list.

Ms Makena says for instance, CMA should create an enabling business environment especially for Reits where the minimum subscription to invest in a Development Reit is Sh5 million, a high threshold for the retail investor.

“For instance the debt limit for an Income Reit, at 35 per cent, is lower than that of the D-Reit, 60 per cent, and yet the former, is a less risky investment due to the existence of cash flows from rental income. Additionally, when compared to other Reit markets, the I-Reit debt limit is much lower,” she argues.

CMA also needs to focus on creating or expanding incentives for both the public and private sector to raise financing through IPOs and follow on offerings.

“This, they note, will deepen the options available to investors and also stimulate the re-emergence of retail investors The CMA can also work closely with trustees of retirement schemes to widen the scope of investments their funds can be used for example, increasing equity allocations, because of the size of their funds they can make a meaningful impact on the market,” advises Mr Kilonzo.