The Capital Markets Authority (CMA) has approved new trading rules for troubled firms listed on the Nairobi Securities Exchange (NSE) in the latest changes seeking to enhance the operations of a special board established to host companies grappling with financial and governance challenges.
The changes include a reduction in the daily trading limit for stocks of troubled firms from 10 percent to five percent and introduction of the special board known as recovery board (RB) in every market segment (Main Investment Market Segment (MIMS) and the Small and Medium-sized Enterprises (SME).
This means that companies that fail to comply with disclosure requirements, delay in reporting of financial results, those with negative working capital, those grappling with a mix of depleted shareholder funds and losses will be transferred to the special board for two years to help them get back on stronger footing.
Failure to recover within this period would eventually lead to delisting of such companies from the exchange but with a written approval of CMA.
The rules look set to rope in troubled firms such as Uchumi Supermarkets, Mumias Sugar Company, Kenya Airways and TransCentury which suffer from a mix of negative equity and lack of timely financial reporting.
The trading limit is seen as a move to temper speculative trading and price manipulation in the shares of such companies whose stocks mostly cost cents to a few shillings each.
The regulator has however retained a board lot of 100 shares for these companies, implying that investors will still be required to trade a minimum of 100 shares in troubled companies on the recovery board which could change to one share over time.
“The proposed changes which have now been approved by the CMA are contained in NSE trading rules 5.10.1 on definition of Recovery Board (RB), 5.10.2 is on price movement bringing five percent in a day, then from 6.2 which included RB in every market segment and then 6.3.4 stipulating the minimum board lot being 100,” CMA Chief Executive Wycliffe Shamiah said in an emailed response.
The separate trading board is designed for listed companies that fall into financial or management trouble.
For instance, companies listed on the main segment of the NSE are required to have issued and fully paid up capital of Sh50 million, more than Sh1 billion worth of assets, suitable , qualified and highly experienced senior management team with no track record of governance issues.
In addition, these companies are required to be solvent with sufficient working capital and should demonstrate good growth potential and revenue generating capacity.
Under the plan, troubled firms will be put on the recovery board for 24 months upon which they will be delisted or suspended from trading if they fail to comply with the listing requirements including solvency and corporate governance requirements.
According to the NSE trading rules, the daily price movement for an equity security in a single trading session shall not be more than 10 percent of the equity average price as determined during the previous session while minimum board lot on the normal board shall be 100 securities and the maximum board lot on the Odd Lots board shall be 99 securities.
But companies on the recovery board will operate with a daily stock price trading limit of five percent.
“We are reducing daily limits to five percent from 10 percent for the affected companies. The companies have a two-year period to work on their performance,” NSE’s Chief Officer for Regulatory Affairs Titus Kiilu said.
The daily trading limit refers to the maximum amount by which the price of a stock or other exchange-traded security can rise or fall during a trading session. The limits are set by the exchange in an attempt to avoid extreme volatility or manipulation in the markets.
A board lot, on the other hand, is a minimum number of shares that an investor can buy or sell in a single transaction on a stock exchange that is determined based on the exchange where the security is trading and the stock price.
Odd lot means a lot comprising less than 100 equity securities.
CMA authorised NSE to prepare and submit for approval the rules for the setting up and administration of a board on which the shares of the troubled firms on the recovery list may be traded.
CMA and NSE jointly proposed the establishment of a recovery board at the exchange, on which listed firms which are technically insolvent, non-compliant with listing obligations or whose operations are being conducted in a manner that is prejudicial to the interest of investors or market integrity can be temporarily transferred to enhance investor protection.
This will offer companies facing challenges an opportunity to develop and implement recovery plans or ensure full compliance with the requisite listing obligations or such other conditions as may be imposed by the CMA, while ensuring transparency to the investing public on the status of the entity.
However the new rules that were first published in the gazette notice dated October 27, 2023 give troubled firms the right to be heard by the regulators (CMA and NSE) before being placed on the recovery board.
The recovery board will seek to ensure companies are governed and closely regulated to prevent losses to investors.
Failure to recover within this period would eventually lead to delisting of such companies from the exchange.
The policy shift which has been in the works since 2018 seeks to protect investors from buying shares in troubled firms, avert unexpected company failures and help revive investor confidence in the volatile equity trading business.
