?Introductory guide to the Capital( Equity) Markets in Kenya.

Title: An In-Depth Exploration of Kenya's Capital (Equity) Markets

Introduction:

The global financial landscape comprises of various distinct markets, each serving unique functions. Among these are the bond, loan, and interbank markets, along with the capital markets, encompassing both equity and debt markets, derivative markets, and structured finance markets. Additionally, international financial markets include submarkets such as money markets, commodity and shipping markets, insurance markets, and the gold market. In this preliminary guide, we delve into Kenya's Capital (Equity) Markets, examining its regulatory framework and associated considerations.

Kenyan Capital Markets Overview:

In Kenya, we encounter six distinct markets: Equities, Debt, Exchange Traded Products, Real Estate Investment Trusts (REITs), and Unquoted Securities Markets. These markets operate under the oversight of two key players: ?The Capital Markets Authority which is the regulatory authority responsible for setting standards and the Nairobi Stock Exchange which is ?the recognized investment exchange where tradeable securities are officially listed. There are two pivotal acts governing ?transactions within this sphere: the Capital Markets Authority Act Cap 485 A of Laws of Kenya and the Central Depositories Act of 2000. Additionally, a multitude of guidelines and regulations have been developed to reinforce these acts and ensure the efficient functioning of the market segments, products, and reporting obligations.

Listing Process:

The process of listing securities in Kenya is a two-fold endeavour. It commences with an application to the CMA for the admission of an entity's securities to the Official List, followed by an application to the Nairobi Stock Exchange Market. Various listing options are available, including primary, secondary, cross, reverse listing, private placements, and global issuances.

Primary market issuance involves a company issuing new shares, either within its home jurisdiction or in a third-party country. This issuance can be executed through a subscription offer, where shares are made available to the public, or by placement, targeting a select group of institutional investors. While a subscription offer entails rigorous compliance with regulations, including mandatory disclosures and prospectus requirements, placement offers a less stringent and a cost-effective alternative. In Kenya, this type of listing is limited to a maximum of 100 shareholders who must possess a thorough understanding of the risks involved in the listing process and market operations.

Secondary markets are platforms where existing shareholders trade their shares with new or other shareholders without raising additional capital. Access to the secondary market is granted through the admission of shares to a recognized investment exchange, such as the Main Market of the Nairobi Stock Exchange. In this market, investors can trade their financial securities with existing or new shareholders, promoting liquidity and price stabilization. Prices in the secondary market fluctuate based on demand and supply dynamics.

Cross listing entails offering common shares on a different stock exchange market from the initial primary market, while international IPOs enable companies to list in their home jurisdiction while allowing institutional investors from other countries to subscribe. Additionally, reverse listing occurs when an unlisted company acquires a listed company, automatically gaining listing status through the acquisition.

Equity Market Segments:

Kenya's Equity Markets comprise of three main segments: the Main Market Investment, the Alternative Investment Market, and the Growth Enterprise Markets. The Main Market Investment imposes the most stringent requirements, including a minimum ordinary share capital of Kshs. 50 million, minimum net assets of Kshs. 100 million, audited financial accounts following IFRS reporting standards, a dividend policy, and specific share ownership criteria.

The Alternative Investment Market segment has lower capital requirements, with a paid-up share capital of Kshs. 20 million, net assets amounting to Kshs. 20 million, and no working capital prerequisites. However, ?in this segment, 20% of a company's shares cannot be exclusively held by fewer than 100 shareholders.

The Growth Enterprise Market segment is designed to encourage SMEs to raise capital through the markets. It mandates a minimum share capital of Kshs. 10 million, a board of at least five members, with three being non-executive directors, and a requirement that 15% of the shares be publicly tradable, held by at least 25 individuals. All issued shares must also be deposited with the Central Depository, and a nominated advisor must be appointed and maintained.

Pre-Listing Considerations:

Prior to listing, companies must address several critical considerations. Firstly, all companies seeking listing must appoint a transaction advisor. Moreover, companies aiming for listing on the Growth Enterprise Market Segment must contract a Nominated Advisor to guide them through the application process and ensure the completeness and correctness of submitted documentation. Corporate governance is of utmost importance, with requirements including a minimum of one-third non-executive directors on the Board, the establishment of an audit committee in compliance with Capital Markets Authority guidelines, and limitations on the Chairman's concurrent positions in listed companies.

Additionally, key personnel such as the CFO, head of accounting, and company secretary must be members of their respective professional institutes. Pre-listing tasks encompass revising the Memorandum and Articles of Association to align with corporate governance guidelines, maintaining a company register for shareholders, and amending Articles of Association to comply with relevant regulations concerning immobilized securities. These considerations form pivotal steps in the listing process.

Tax Incentives:

Kenya's capital markets offer various tax incentives to promote participation. These incentives include the elimination of Stamp Duty payments for companies listed on the Nairobi Stock Exchange for share capital or share capital increases. Legal expenses incurred during the issuance of shares without raising capital are now tax-deductible for corporations. Newly listed companies benefit from a reduced corporate tax rate of 25%, a 5% reduction from the standard 30%, for a five-year period after their initial listing. Additionally, both new and expanded share capital by listed companies or those seeking listing has been exempt from stamp duty. Furthermore, exemptions have been introduced for capital gains tax on shares sold at a profit, stamp duty, and value-added tax on the transfer of listed securities. IPO costs are also considered tax-deductible expenses. These incentives collectively aim to stimulate capital market activities.

Challenges and Future Perspectives:

?Despite these incentives, new listings in the Kenyan capital market have been relatively scarce. For example, the Main Market currently lists only fifty companies, with the last listing dating back to 2018. The Alternative Investment Market has only nine listed companies, and the Growth Enterprise Market segment has just five. A significant factor contributing to this scarcity is the mandatory requirement of single class share listing coupled with ?the continued limitations on the number of shares held by a single shareholder. These two listing rules make it challenging for founder-led companies to maintain control rights upon listing. Founder-led companies often opt for private equity financing models with less intrusive structures. To address this challenge, international markets such as the New York, Hongkong ,London and Singapore Stock exchanges have introduced the concept of dual class shareholder structures to encourage founder led companies to list stock. This model addresses the risk of dilution of control and increases founder confidence in listing to the public.

Furthermore, there are minimal differentiations in market capitalisation for shares within Main investment Market, Alternative Investment Market, and Growth Enterprise Market segments. The Main Investment Market, while having lower entry requirements and increased tax incentives, is not marketed as a prime segment. Typically, the Main Investment Markets are characterized by tighter rules, higher market capitalizations, and more stringent disclosure requirements, which enhance investor confidence in companies within this segment. The alternative market segment and the high growth segment are typically the segments created with the aim of attracting SMES, but the current Kenyan structure does not evidence this stark differentiation requirement. All three segments in an ideal world fall within the broad definition of SMEs when different categorisations should evidence the different organisational sizes, tenure, and standards of practice.

Kenya's Capital (Equity) Markets may have a long way to go. It may need quicker responsiveness to investor needs, better segmentation considerations, more innovative product offering including SPAC related listing categories, and inclusion of wider and more innovative share categories that meet investor current investor needs.

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