Kenya is working on rules to tighten controls on the trading of shares of private companies over the counter — where companies opt to list at the Nairobi Securities Exchange without selling new shares.
Analysts say the OTC market can under the existing system be manipulated ahead of a listing by introduction, by existing shareholders inflating a company’s worth. Regulators now want to rule out this possibility.
“What companies are doing is that they raise capital from targeted equity investors through private placement and then come to the market to list those existing shares in order to provide these investors with an exit route. But the prices at which these shares are trading in the OTC market are set by the companies themselves,” a market player who sought anonymity told The EastAfrican.
The pricing and the cost of placement have seen only 11 flotations between 2000 and 2016, which raised $689 million.
Since listing by introduction was allowed to increase the number of securities available to investors, there have been 11 introductions, starting with that by Equity Bank in 2006. Other such listings are CfC Insurance Holdings, TransCentury, Longhorn Publishers, CIC Insurance and Home Afrika Ltd.
Kenya’s last IPO was in 2014 when the NSE went public by floating 66 million new shares. The IPO of the Stanlib I-Reit last year represents more of a special purpose vehicle than a new company coming to the bourse.
In the past three years, there have been four listings by introduction — by Flame Tree, Kurwitu, Nairobi Business Ventures and fashion retailer Deacons East Africa, which listed 124 million shares last week.
To level the playing field, the Capital Market Authority (CMA) has procured consultants from the World Bank to develop rules to regulate the OTC market. Their findings will help govern the trading of bonds and equity away from the bourse.
“Currently, we don’t have control over the OTC market, but we are trying to come up with an approved regulatory framework for it,” an industry source privy to the matter said.
The regulator is understood to have been working on the guidelines for a year and is on the verge of drafting a framework pending input from stakeholders.
“This could take a bit of time because we have many issues to agree upon with the stakeholders,” the source added. CMA chief executive Paul Muthaura was not immediately available for comment.
Analysts argued that companies have also turned to listing existing shares to escape the stringent regulatory approvals and take advantage of the lower costs of listing, which exclude underwriting, marketing, placement and advisory costs.
Early this year Kenya reduced the cost of raising capital on the NSE to improve competitiveness, attract more companies and transform the country into a regional financial hub.
The National Treasury gazetted a new fee structure that capped approval fees for capital raising programmes by companies at Ksh30 million ($300,000) from a variable charge of 0.15 per cent that was previously based on the value of the transaction.
