Unlocking New Listings on the Nairobi Bourse

Oct 21, 2018

The Nairobi Securities Exchange (NSE) has struggled to attract new listings, having only raised Kshs 4.2 bn in two initial public offers (IPO’s) in the last 5-years, with one each in 2014 and 2015 by NSE and Stanlib Investments, respectively. Currently the bourse has 64 listed stocks with a total market capitalization of Kshs 2.16 tn, of which Safaricom controls 44.0% market share. The Capital Markets Authority (CMA) has raised concerns that Kenya has been unable to achieve its projected listings targets as articulated in its Capital Markets Master Plan, which envisions at least four listings on the NSE every year. CMA has also noted that a few large cap stocks, namely Safaricom PLC, East African Breweries Ltd, Equity group Holdings and KCB Group Ltd, hold almost 75.0% of the total market capitalization, making the market volatile, due to the dependence on these few stocks, which presents a risk of a market collapse should anything happen to those companies. To remedy the listing drought, the CMA has been engaging stakeholders, who include the National Treasury, NSE, Central Depository and Settlement Corporation (CDSC), and Fund Managers Association (FMA), among others, to come up with value propositions for listing in the bourse as well as come up with propositions to reduce the tight regulations of entry into the bourse. From the engagements, NSE disclosed their strategy, which seeks to introduce an incubator board designed to accelerate the growth and success of entrepreneurial companies, through an array of business support resources and services to nurture firms that are not ready to list but have promising prospects. This is geared towards helping in developing a pipeline of successful businesses for possible listing on the exchange. In this week’s focus note, we take a view on the reasons behind the low number of new listings, as well as recommendations on what should be done to end NSE’s IPO drought. To cover this topic, we shall address the following:

  1. The structure, types of listing, and requirements for listing in the different segments in the NSE,
  2. Reasons behind the low number of new listings in the Nairobi Securities Exchange,
  3. A case study of Egypt, and some of the key takeout’s that can be implemented in Kenya, and,
  4. Recommendations to unlock new IPO’s in the Kenyan Capital Market.

Section I: The structure, types of listing, and requirements for listing in the different segments in the NSE:

The NSE market has grown since its registration in 1954 under the Societies Act (1954) as a voluntary association of stockbrokers and charged with the responsibility of developing the securities market and regulating trading activities, with the most recent developments being:

  1. The introduction of the Growth Enterprise Market Segment (GEMS) in 2013, with the intention of providing more options for SMEs finance, especially long-term funding, by use of favourable listing requirements tailored for SME’s. Currently the segment has five listed stocks, with four having listed by introduction, and one through cross listing,
  2. The introduction of NEXT, which is the Nairobi Securities Exchange (NSE) derivatives market aimed at facilitating trading of equity index futures and single stock futures in the Kenyan market. The financial derivatives market is expected to go live in 2019, after conclusion of the 2-phase test trade from July to November 2018, aimed at testing market system set-up, trade execution, reporting and settlement as well as risk management controls. The 1st phase carried between 3rd July and 3rd August 2018, saw participating investment banks and stockbrokers trade in three-month contracts using virtual cash of up to Kshs 1.0 mn. The 2nd phase started in September, involving trading using real money,
  3. Approval of the Policy Guidance Note for the listing and trading of global depositary receipts and notes in July 2017, allowing Kenyan firms to sell shares in other countries without cross-listing as well as International companies to sell shares in Kenya without listing on the NSE,
  4. Launch of the Barclays NewGold ETF, the largest Gold exchange-traded fund (ETF) in Africa and the 7th largest in the world, which was listed on 27th March 2017, valued at approximately USD 1.4 bn. The listing made 400,000 units, valued at nearly Kshs 500 mn, available for trading in the NSE with the opportunity for growth depending on demand, and,
  5. The change of name to the Nairobi Securities Exchange in July 2011 Limited reflecting the strategic plan of the NSE to evolve into a full service securities exchange which supports trading, clearing and settlement of equities, debt, derivatives and other associated instruments. In the same year, the equity settlement cycle moved from the previous T+4-settlement cycle to the T+3-settlement cycle.

In 2001, the NSE was split into three market segments according to type of investment and type of asset class, and in 2013, a fourth segment, the Growth Enterprises Market Segment (GEMS), was introduced to give SMEs an opportunity to access the capital markets and grow their businesses. The four segments are discussed below:

  1. Main Investment Market Segment (MIMS): This is the main segment of the NSE where most companies are listed, currently having 48 listed stocks with a total market capitalization of Kshs 2.15 tn, as at 19th October 2018, equivalent to 99.5% of the total NSE market capitalization. It is suitable for bigger companies that have been around for a longer period of time. For a company to be listed in this segment, it must submit at least 5-years of audited financials, 3 of which should be profitable years, and must have at least Kshs 50.0 mn worth of fully paid up share capital and at least, Kshs 100.0 mn in assets. Listing fees for this segment 0.06% of securities value to be listed, subject to a minimum of Kshs 200,000 and a maximum of Kshs 1.5 mn,
  2. Alternative Investment Market Segment (AIMS): This market segment is better suited for medium-sized companies that have at least Kshs 20.0 mn in assets and Kshs 20.0 mn of fully paid up share capital at the time of listing. The company must also have been in existence in the same line of business for a minimum of two-years and demonstrate good growth potential. The AIMS segment currently has 9 listed companies with a market cap of Kshs 8.1 bn as at 19th October 2018 equivalent to 0.4% of the total NSE market cap. Listing fees for this segment are 0.06% of securities value to be listed, subject to a minimum of Kshs 100,000 and a maximum of Kshs 1.0 mn,
  3. Fixed Income Securities Market Segment (FISMS): This segment was designed to incorporate listing and secondary market trading of fixed income securities, mainly corporate and government bonds, and,
  4. Growth Enterprises Market Segment (GEMS): GEMS was introduced to provide a regulated platform whereby SMEs could gain access to cheaper capital market funds and benefit from the regulatory environment that comes with it, promoting corporate governance and transparency. Its requirements were made less stringent to accommodate the smaller growth companies, with requirements such as: (i) no minimum firm asset value and profitability record required, (ii) submission of audited accounts for just the year that precedes the year of listing, with no profitability requirement, and (iii) a minimum of Kshs 10.0 mn in paid up share capital. The GEMS segment currently has 5 listed stocks, with a total market capitalization of Kshs 1.0 bn as at 19th October, 2018 equivalent to 0.1% of the total NSE market capitalization, including Atlas which was suspended in May 2017.

Companies can get listed on the various segments of the market through the following ways:

  1. Initial Public Offer (IPO): This is the most common type of listing. It involves a company issuing new shares while listing on the selected stock exchange that will result in a new set of shareholders from the public buying the shares at a specified share price, and hence the company raising capital from the exercise,
  2. Listing by Introduction: This type of listing occurs when a company takes its existing shares and lists them on an exchange. Since only existing shares are listed by introduction, it follows that no new shares will be issued and no additional funds will be raised. This type of listing only provides the company with a regulated environment within which to operate and a platform to trade shares with the public investors in the capital markets,
  3. Cross Listing: This occurs when a company that is already listed on one stock exchange decides to list on another stock exchange other than its primary or original exchange. Cross listing is advantageous in that it gives the listed company a larger scope of access to capital from different jurisdictions and different investors. No new shares are issued. Atlas managed the first cross listing between the London Stock Exchange and the NSE raising Kshs 450.0 mn, by offering 10% of its 393.9 mn total issued shares for cross-listing on the NSE with price per share set at Kshs 11.5 with a minimum subscription of Kshs 1.0 mn per investor, and,
  4. Reverse Listing: This is a rare kind of listing strategy also referred to as back door listing where a company that is not listed on any exchange purchases a listed company and becomes automatically listed by virtue of this transaction. It is common when a company that wants to have access to the capital markets also wants to avoid the time and cost spent in a regular listing. The listing of I&M bank for instance, was through reverse acquisition of City Trust Limited (CTL) in 2013.

As mentioned earlier, the NSE is categorized into different market segments approved by CMA. The segments as stipulated have different eligibility, trading restrictions and disclosure requirements, prescribed by CMA that companies planning to publicly offer shares through listing have to abide to. Below is a summary of those requirements:

Table showing the Requirements for public offering of shares and listing


Criteria for the Main Investment

Market Segment(MIMS)

Criteria for The


Investment Market

Segment (AIMS)

Criteria for the

Growth Enterprise

Market Segment(GEMS)

Incorporation status  


It should be a public company limited by shares and registered under the Companies Act

Share Capital 

The issuer should have a minimum of Kshs 50.0 mn of authorized issued and fully paid up ordinary share capital

The issuer should have a minimum of Kshs 20.0 mn of authorized issued and fully paid up ordinary share capital

The issuer should have a minimum authorized and fully paid up ordinary share capital of Kshs 10.0 mn and must have not less than 100,000 shares in issue

Net Assets  


Net assets immediately before the public offering or listing of shares should not be less than Kshs 100.0 mn.

Net assets immediately before the public offering or listing of shares should not be less than Kshs 20.0 mn


Free Transferability of Shares  



Shares to be listed should be freely transferable and not subject to any restrictions on marketability or any pre-emptive rights.


Availability and Reliability of  Financial records  


  • The issuer should have audited financial statements complying with IFRS for an accounting period ending on a date not more than 4-months prior to the proposed date of the offer or listing for issuers whose securities are not listed at the securities exchange, and 6-months for issuers whose securities are listed at the securities exchange.
  • The Issuer must have prepared financial statements for the latest accounting period on a going concern basis and the audit report must not contain any emphasis of matter or qualification in this regard


Solvency and

adequacy of working


  • The issuer should not be insolvent and should have adequate

working capital

  • The issuer should not be insolvent and should have adequate Working capital.
  • The Directors of the Issuer shall also give an opinion on the adequacy of working capital for at least 12 months immediately following the share offering, and the auditors of the issuer shall confirm in writing the adequacy of that capital.

Share Ownership Structure

  • Following the public share offering or immediately prior to listing in the case of an introduction at least 25.0% of the shares must be held by not less than 1,000 shareholders excluding employees of the issuer.
  • In the case of a listing by introduction, the issuer shall ensure that the existing shareholders, associated persons or such other group of controlling shareholders who have influence over management shall give an undertaking not to sell their shareholding before the expiry of a period of 24 months following listing and such undertaking shall be disclosed in the Information Memorandum
  • Following the public share offering or immediately prior to listing in the case of an introduction, at least 20.0% of the shares must be held by not less than 100 shareholders excluding employees of the issuer or family members of the controlling shareholders.
  • No investor shall also hold more than 3.0% of the 20.0% shareholding.
  • The issuer must ensure that the existing shareholders, associated persons or such other group of controlling shareholders who have influence over management shall give an undertaking to the Authority not to sell their shareholding before the expiry of a period of 24 months following listing and such undertaking shall be disclosed in the Information Memorandum.
  • The Issuer must ensure at least 15.0% of the issued shares, (excluding those held by a controlling shareholder or people associated or acting in concert with him; or the Company's Senior Managers) are available for trade by the public.
  • An issuer shall cease to be eligible for listing upon the expiry of 3 months of the listing date, if the securities available for trade by the public are held by less than 25 shareholders (excluding those held by a controlling shareholder or people associated or acting in concert with him, or the Company's Senior Managers)
  • The issuer must ensure that the existing shareholders, associated persons or such other group of controlling shareholders, who have influence over management, shall give an undertaking in terms agreeable to the Authority, and the Securities Exchange restricting the sale of part or the whole of their shareholding before the expiry of a period of twenty-four months following listing.

Track record,

profitability and

future prospects

The issuer must have declared profits after tax attributable to shareholders in at least three of the last five completed accounting periods to the date of the offer

The issuer must have been in existence in the same line of business for a minimum of two years one of which should reflect a profit with good growth Potential.


Dividend policy

The issuer must have a clear future dividend policy.



Source: NSE

Section II: Reasons behind the low number of new listings in the Nairobi Securities Exchange

According to PWC’s, 2017 Africa Capital Markets watch, Africa has recorded 134 IPO’s between 2013 and 2017. In 2017, the continent recorded 28 IPO’s raising a total of USD 2.9 bn, up from 24 IPO’s recorded in 2016 raising a total of USD 1.6 bn. Out of the 134 IPO’s recorded in the last 5-years in Africa, Kenya only managed to attract 2 IPOS, through the NSE IPO in 2014, which raised Kshs 627.0 mn by selling 66 mn new shares at a price of Kshs 9.5 per share, and the Income-Real Estate Investment Trust (Reit) IPO in 2015 by Stanlib Investments that  grossed Kshs 3.6 bn.  IPO activity in the African region has mainly been dominated by the South African Capital Market, having raised USD 4.8 bn in the past 5 years through 44 IPO’s representing 52.0% of the total capital raised through IPO’s in the region.  The Egypt and Tunisia bourses have also been performing well having had 13 and 23 IPO’s, raising USD 1.3 bn and USD 391.0 mn USD, respectively.

Top 5 Countries With the Highest Number of IPOs (2013-2017)


Number of IPO's

Capital raised (USD mn)

South Africa















*BRVM- regional stock exchange serving the following West African countries: Benin Burkina Faso Guinea Bissau Côte d'Ivoire Mali Niger Senegal Togo

Source: PWC  2017 Africa Capital Markets watch

To address the issue of low number of listings as well as slow uptake of the capital markets products in Kenya, CMA has been embarking on offering incentives to attract companies with the potential to list to the bourse, which include:

  1. A lower corporate tax of 27.0% for 3-years, set to commence immediately after company’s financial year following the date of listing for a newly listed Company approved under the Capital Markets Act with at least 20.0% of its issued share capital listed. Under the Income Tax Bill, 2018 there was a proposal to amend this and raise the rate to 30.0% for 3 years,
  2. A lower corporate tax of 25.0% for a period of 5-years, set to commence immediately after the company’s financial year following the date of listing for a newly listed company on any securities exchange approved under the Capital Markets Act with at least 30.0% of its issued share capital listed. Under the Income Tax bill, 2018 there was a proposal to amend this and raise the rate to 30.0% for 5-years,
  3. A lower corporate tax of 20.0%, for a period of 5-years commencing immediately after the year of income following the date of listing of a company which has at least 40.0% of its issued share capital listed. Under the Income Tax bill, 2018 there was a proposal to amend this and raise the rate to 25.0% for 5-years,
  4. There were amendments made to reduce listing fees by 50.0% i.e. from the initial 0.3% to 0.2% for offers of equity,
  5. All the expenditure of a capital nature incurred in the financial year when the listing took place, by a person on legal costs and other incidental expenses relating to the authorization and issue of shares, debentures or similar securities offered for purchase by the public were made tax deductible expenses,
  6. Cost of credit rating was also made tax deductible to encourage credit rating by companies, and,
  7. A tax amnesty on past omitted income for companies that apply and are listed, provided they make a full disclosure and undertake to pay all their future due taxes.

The incentives have however, not boosted the number of listings. We believe this is because the measures undertaken to address the low number of listings have not taken a bottoms-up approach to identify the real impediment to listings, focusing mainly on tax exemptions whilst there are a number of deep underlying issues that still need to be remedied, in order to make the country’s capital market robust. Some of the key issues that we believe should be addressed in order to unlock capital in the capital markets include:

  1. Stringent regulatory framework and disclosure requirements: The regulatory framework in Kenya’s capital market has partially been a major impeding factor to the uptake of capital markets products as well as the number of listings in the bourse. Requirements such as the debt ratios, minimum number of shareholders and capital requirements, costs associated with compliance with regulatory as well as corporate governance framework requirements have been a limiting factor for companies to list. Most non-listed companies shy away from listing as compliance to some of these requirements amounts to loss of privacy exposing the company to the public domain, which they perceive as a loss of competitive advantage. There also is a concern in the efficiency of the processes in the capital market due to the stringent regulations and approvals that normally take too long, making listing as well as de listing on the NSE a challenging, long and tedious process. For instance, the de listing of Hutchings Biemer and A. Baumann was effected 16-years and 9-years later after the two companies were suspended from trading, respectively,
  2. Harmonizing tax incentives between Bank Funding and Capital Market Funding: Currently, other non-bank funding entities and capital markets products such as unit trust funds and private investment do not enjoy similar tax incentives available to banks e.g. the 15% final withholding tax that bank depositors enjoy. These entities are however, essential to the economy in mobilizing savings, which improves efficiency, liquidity and volume of investments in the capital markets and in effect, enhance economic growth and development. The government needs to harmonize tax incentives so that other non-bank funding entities and capital markets products become more attractive to investors,
  3. Costs associated with listing: Issuing of shares in the stock exchange usually involves some direct costs perceived to be high especially for smaller firms because the companies have to pay annual listing fees. Kenya’s economy has dominance of small and medium sized enterprises, which are mainly reliant on bank loans. According to a study by the CMA, the percentage cost of floating securities in the capitals market is relatively lower than bank lending rates. According to the study, IPO costs have ranged from 1.9% to 10.6% from 2012-2016, compared to bank lending rates ranging at 13.0%-16.0%, with the highest being the floatation of Eveready at 10.6% and the lowest being Deacons in 2016 at 1.9%. CMA also noted that compared to bank loans, which are annual costs over the tenure of the relevant loans, the cost of floatation is a one-off cost. Despite raising capital through the capital markets being cheaper than loans, lack of awareness by companies with the capacity to list has been established as one of the major issue in emerging markets, as companies do not fully understand the benefits accrued to them from floating their shares,
  4. Size of companies: As stated earlier, Kenya’s economy has a dominance of small and medium scale enterprises mainly reliant on bank loans and other informal sources of financing. Quoting Chemmanur (2005), “only large old public firms with adequate cash flows and private limited firms that have accumulated a track record of successful performance find it optimal to go public by issuing IPO”. This has made small companies shy away from listing for fear of having failed IPO’s. IPOs are described as great indicators that a firm has matured. With this in mind, the low number of listings in our country maybe an indication of a deeper underlying issue, that start-up companies in the country are not growing big enough thus the reason the informal sector still dominates the economy,
  5. Market infrastructure: The evolution of infrastructure in a capitals market is an essential factor as it influences demand and supply of capital bringing investors and companies together as well as allow adequate dissemination of information. The NSE has seen an improvement in its market infrastructure over the years. In November 2004, the automated central clearing settlement and depository system (CDS) was commissioned. This essentially facilitated the electronic trading of shares. In September 2006, there was the introduction of live trading through the automated trading systems (ATS) which matching of bids and asks orders automatically as well as execution of the orders on a first come first served basis by the stockbrokers. The bourse has continued to be more diverse, with the latest development in the offing being the licensing to set up a derivatives exchange, which has seen the NSE continue to work with stakeholders to ensure the institutions and infrastructure necessary are in place. However, to attract more capital including foreign investors, there is need to implement liquidity-enhancing mechanisms, such as securities lending and short selling, derivatives like commodity contracts, stock and currency futures. The implementation of these however is reliant on proper infrastructure and platforms for execution. On this front, the Nairobi Securities Exchange has been testing its derivatives trading platform, which is set to go live next year,
  6. Loss of control: Many firms especially family owned or closely held companies are reluctant to list due to fears of dilution of ownership and lose of voting control. The companies tend to rely on bank finance as well as a proven network of family and friends to raise additional capital when required. Companies also avoid listing due to constant pressure to increase earnings that come with it as public shareholders unlike the original owners, usually take a short-term view mainly interested in seeing constant rises in the stock's price so they can sell their shares for a profit and less emphasis on the values and core ideologies of the company. To remedy this, we believe that the NSE and the government, through amendments to the Company Act, should come up with alternative policies to address the concerns of loss control by major investors’ e.g. allow companies to have a shareholders structure that ensures the initial owners do not lose control. As in the case of Facebook, which has a dual class stock structure consisting of Class A and Class B shares. Facebook’s founder Mark Zuckerberg and a small group of insiders have about 18.0% of the shares. Despite this, Zuckerberg and the small group of insiders owns the majority voting rights. This is because, as per their shareholding structure, they hold a class of shares of the company, which carry 10 votes per share as compared to what is held by the public shareholders, that carry only one vote per share,
  7. Shallow market: A shallow market is one with few instruments and relatively low liquidity, leaving firms with minimal financing options. The strength of securities markets that make them essential in an economy, is the ability to mobilize long term savings for financing long term ventures, to improve efficiency of resource allocation through competitive pricing mechanisms, to provide capital, and encourage broader ownership of firms. A robust stock market assists in the rational and efficient allocation of capital. The NSE is characterized by intermittent trading of relatively few stocks, often held by a relatively small group of investors making it inefficient. The NSE also lags behind in the number of listed stocks as compared to countries such as South Africa with a total of 165 listed companies. To enhance the level of activity, improve liquidity and attract more capital in the bourse, foreign ownership limits were lifted effective July 2015 allowing foreigners to hold over 75.0% of the listed companies in the NSE. Despite this, the market still lags behind being heavily reliant on a few stocks thus limiting liquidity in the market and in effect discouraging listing as companies with the potential to list shy away for fear of having failed IPOs,
  8. The rise of Private Equity firms providing easily accessible capital: Kenya’s private equity space has been vibrant. Raising capital through private equity firms has been on the rise, filling much of the void left by the drought in IPOs. The attractiveness of private equity funding as opposed to public listing is mainly because, private equity funding gives companies the opportunity to continue financing their growth while remaining privately held which, allows companies to preserve decision-making control which is usually lost when companies list, and,
  9. False Market Perception that Capital Markets Should Play a Second Fiddle to Banking Industry: In developed economies, capital markets funding is larger than bank funding, at 60% compared to banks, which only provide 40% of the funding in the market. Whereas in Kenya it is the opposite with the capital markets providing 5% of the funding in the market and banks providing 95%. Beyond the numbers, there is somehow acceptance that banks control the economic agenda, rather than them being equal to capital markets. For example, we had a case of an innovative product, Cash Management Solutions, CMS, which was phased out of the market, just because banks did not like it. In more developed markets, the capital markets industry and the regulator would have pushed back on the banking industry. Capital markets ought to view itself as just as important as the banking industry.

Section III: Case Study of the Egyptian Exchange

The Egyptian Exchange (EGX) has established itself as one of the most active markets in Africa as evidenced by the rise in the number of new listings. It comprises of two exchanges, Cairo and Alexandria that share a trading, settling and clearing system as well as governed by the same board of directors. Between 2011 and 2013, the bourse did not record a single IPO; partly attributed to the Egypt 2011 uprising that negatively affected the conditions for listings, which also saw the temporary closure of the exchange. In February 2014, new listing and disclosure requirements took effect in the bourse, becoming one of the most significant regulatory changes carried out by the EGX authority in recent years. The rules introduced incentivized IPO’s by providing better regulatory clarity, addressing issues such as minimum number of shareholders, percentage free float requirement and minimum number of shares to be listed. The new listing rules also reduced the listing documents by around 50.0%. To make the process of listing simpler, the authority also agreed to accept listing companies on conditional basis, with the agreement that the companies were to provide the less essential documents at a future date for them to remain listed.  Further amendments and additions have been integrated in the listing rules over the years to ensure a wider application of corporate governance, more investors' protection and making disclosure requirements friendlier.

EGX also embarked on conducting meetings with promising companies to enhance awareness of the benefits of getting listed as well as organizing the 1st EGX IPO summit in 2014 that attracted more than 300 firms, to give companies better insight into listing and its benefits to the growth of businesses. The implementation of these changes saw the spate in growth in IPO activity. It saw Egypt emerge as one of the principal generator of public offerings in 2015 in the Middle East and North Africa (MENA) region, raising a total of USD 752.0 mn, from four IPO’s. Since then, the activity in the bourse has been stable recording four IPO’s annually since 2015 according to data from PWC’s African capital markets report. Foreign participation was also on the rise recording an average of 56.0% since 2014, indicating improved investor sentiments since the uprising in 2011, which led to investors exiting the market.

The improved investor sentiments have also reflected in the oversubscriptions of the IPO’s, which were as high as 31-times in some of the IPO’s. The exchange has continued to embark on efforts to boost transparency, which saw the introduction of the Electronic Disclosure System in 2015 that enables companies to send their disclosures to the authority electronically. The amendments in the listing rules have mainly focused on raising the degree of corporate governance and investor protection, among them, which include introduction of a requirement that, managers, directors and founders of companies seeking to list should not have previous court judgments issued against them. In order to deepen the market, increase liquidity and draw local and foreign investors, Beltone Financial Holding was issued with Egypt’s first license in March 2014, to operate an exchange-traded fund (ETF), which is a marketable security that tracks an index giving investors exposure to a range of various stocks. This granted investors the opportunity to start trading from January 2015 when it became operational. The ETF tracks Egypt’s main index EGX30 and on its commencement day, it led to a 2.5% rise in the index a clear indication of its positive effects to the market. The authority has continued reinforcing the bourse performance through:

  1. Continuous development of the legislation and regulatory framework to ensure investor protection,
  2. The introduction of new technologies with the latest being the introduction of EGYCOMEX, which will be the first electronic Commodities Exchange in the MENA region
  3. Continued investment in human infrastructure, and enhanced corporate governance.

The government of Egypt has also been on the forefront in the efforts to boost the number of IPO’s in the country. In March 2018, the government announced the names of 23 state companies in different sectors ranging from banking and petroleum to real estate that it planned to sell stakes through minority share offerings on the Cairo bourse in a bid to raise USD 4.6 bn. 

From the above, it is clear that there are concerted efforts towards making the Egypt’s capital market robust, which believe can also be adopted in Kenyan to remedy the drought in the number of IPO’s over the years. In summary, Egypt has mainly focused on the following:

  1. Finding the balance by making the rules and regulations friendly while still maintaining investor protection and not sacrificing minimum requirements for disclosure,
  2. Remedying the issues of shallow markets through the introduction of liquidity-enhancing mechanisms such as the introduction of the exchange-traded fund (ETF) which tracks the EGX 30 index,
  3. Addressing the issue of tedious listing processes through implementation of various reforms,
  4. Efforts by the Government to encourage the number of listings through privatization of some of the state corporations,
  5. Active campaigns to sensitize companies with a potential top list through the IPO forums as well as promoting the bourse to foreign markets which has even seen the EGX authorities even organizing an Egyptian Capital Markets Day in the USA, and,
  6. To support growing medium and small enterprises, the Egyptian Exchange (EGX) also initiated a secondary market, NILEX in 2010. The NILEX has lighter disclosure requirements in terms of the quarterly and semi-annually financials compared to the main board, which is the EGX, as they are not required to be submitted to the regulator for approval. Listing in the NILEX is also easier and cheaper as the companies are only required to provide one year’s financial statements.

Section IV: Recommendations to remedy the low number of listings:

From the issues identified, we are of the view that the following should be done to facilitate growth in the number of new listings as well as development of products in the NSE:

  • Embarking on privatization of some of the state corporations through listing: Over the years, the NSE has played an increasingly important role in the Kenyan economy, especially in the privatization of state-owned enterprises. The privatization process started in 1988 when the government floated 7.5 mn shares equivalent to 20.0% equity of the Kenya Commercial Bank (KCB) that was over- subscribed by 2.3-times. Since then the government has had subsequent issues, which have also been popular, recording subscription rates of as high as 400%. A study by CMA shows that successful IPOs by State Owned Enterprises, in Kenya have generated significant interest in the market, attracting a good number of private companies to list immediately after. KCB’s 327% over-subscription in 1988 immediately attracted the listing of Total Oil Company, Standard Chartered Bank and Nation Printers. The 303.0% oversubscription of Housing Finance Corporation of Kenya in 1992 also attracted new companies like Crown Berger, East African oxygen (BOC), NIC, Firestone, Rea Vipingo and East African Portland Cement to the stock market. We are of the view that the government should embark on privatization of some of the state corporations through listing in a bid to bolster investment in order to revive the economy. Privatization would also lead to additional revenue, which would also effectively reduce the fiscal deficit as well as reduce a portion of the recurrent expenditure in running them. This strategy has been replicated in various economies such as Brazil, which earmarked 57 companies in 2017 to be privatized as well as Egypt, which named 23 companies in March 2018 that the government is planning to privatize through listing. Privatization also has a positive impact on the financial performance of poorly managed state companies are usually insulated from the same discipline requirements as private companies.
  • Harmonizing tax incentives: We are of the view that tax incentives available to banks should also be made available to non-bank funding entities and capital markets products such as unit trust funds and private investment funds. For example, providing alternative and capital markets funding organizations with the same withholding tax incentives that banking deposits enjoy, of a 15% final withholding tax so that investors don’t feel that they have to go to a bank to enjoy the 15% tax, which is final; alternatively, normalize the tax on interest for all players at 30% to level the playing field,
  • Review of rules and regulations: In order to remedy this, the CMA should continuously review, identify and amend restrictive provisions in the capital markets and related Laws that are unattractive to capital raising and listing to ensure the rules in place facilitate rather than deter active participation in the markets. This include rules such as the restrictive regulation inhibiting participation of investors. For example, the minimum amount an investor can put in a DREIT at Kshs 5.0 mn,
  • Engaging with private equity firms to consider exiting through the capital markets: The size of the private equity market space in Africa and more so in Kenya, largely involved in financing businesses showing great potential in the market has grown significantly in the recent past. The Capital market Authority ought to engage with private equity firms to consider exit mechanisms through the capital markets to take advantage of the vibrancy in the PE space to compliment the capital markets activities. For this to happen however, the issue of the shallow market in the NSE needs to be addressed in order to make exiting through IPO’s feasible.
  • Awareness programs aimed at enhancing literacy on capital markets: One of the major impediments to the number of listings as well as uptake in the products listed in the NSE remains to be the level of awareness and knowledge by the companies with listing potential as well as the local investors who are important in driving IPOs. In order to rectify this, the CMA as well as other market stakeholders should embark on a comprehensive awareness programme targeted at enhancing literacy on the capital markets and the various opportunity accrued to its participants.

In conclusion, regulators should focus on making the process of listing appealing to companies while still maintaining investor protection and not sacrificing minimum requirements for disclosure. They should also sensitize companies on the importance of listing to companies as well as focus on liquidity-enhancing mechanisms, such as securities lending and short selling, derivatives like commodity contracts, stock and currency futures to deepen the capital markets and provide a range of options to investors. The government should also stimulate the Capital markets through the privatization of state- owned enterprises through the NSE.


Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.