Rights issues or offers by firms to existing shareholders to purchase additional shares have been the dominant fixture of capital raising at the Nairobi Securities Exchange (NSE)amid an initial public offering (IPO) drought.
In an IPO, a company sells shares to new members while simultaneously listing or going public.
An analysis of capital raising initiatives at the bourse shows nine rights issues in the past decade including the most recent offering by the HF Group announced this week.
The eight completed rights issues were by DTB, NIC Bank (now NCBA), Uchumi Supermarkets, HF Group, Longhorn Publishers, KenGen, Crown Paints and TransCentury.
This contrasts to just two initial public offerings (IPOs) in the same period including the NSE self-listing in 2014 and the 2015 listing of Stanlib Fahari real estate investment trust (Reit).
The right issues generated Sh46 billion in fresh capital for firms but were dwarfed in terms of value by the two IPOs which raised Sh84.1 billion.
Rights issues represent an option to existing shareholders to purchase extra shares in the firms with the proceeds amounting to fresh capital injections.
Cash-strapped companies have turned to the rights issues to raise funding with the option proving popular among listed entities when contrasted to more expensive means including issuing corporate bonds or contracting bank debt.
Five of the eight completed right issues over the past decade have been oversubscribed except for KenGen, Crown Paints and TransCentury offerings in 2016, 2021 and 2022 respectively mirroring the rights as popular among investors and shareholders.
Standard Investment Bank (SIB) Equities Research Analyst Wesley Manambo, however, notes that rights issues have hit the mark largely on investors, particularly majority owners avoiding dilution from skipping the option.
The lack of participation by a majority of shareholder in a rights issue for instance cuts their stake in a company as other investors gain more ownership.
“Sometimes shareholders do not necessarily buy into the idea of rights issue as a whole, but we see the offerings turning out a success as existing shareholders avoid dilution," Mr Manambo notes.
"This means the shareholders will inject new capital as requested to maintain their shareholding for capital gains and dividend prospects. As such it becomes very easy for a company to raise funding through rights issues.”
The NSE has struggled to attract new IPOs since its own listing a decade ago despite a government pronouncement on the privatisation of six to 10 parastatals through the market in late 2022.
Potential listings from private firms including Credit Bank and Bio Foods in 2023 have also failed to materialise on a combination of external and domestic headwinds including a global slowdown and the Covid-19 pandemic.
“It’s easier to target existing investors than shopping for new ones. The attractiveness of the market in terms of ease of entry and exit has been affected by conditions including high interest rates, Covid-19, the Russia-Ukraine crisis and the high global inflation environment,” added Mr Manambo
