In a bid to revitalize initial public offerings (IPOs) and break a seven-year drought on the Nairobi Securities Exchange (NSE), companies seeking listing are now only required to demonstrate profitability once in the last five years. The new regulations, published by Treasury Cabinet Secretary Njuguna Ndung’u, mark a significant departure from the previous mandate, which demanded companies to show profits in three of the last five years before going public. This move is anticipated to open doors for previously excluded businesses to raise capital through IPOs.
Amidst a challenging economic landscape exacerbated by the Covid-19 pandemic, the Russia-Ukraine war, and interest rate hikes in wealthy nations, many businesses have struggled to show consistent profitability. The updated rules, titled “The Capital Markets (Public Offers, Listings, and Disclosures) Regulations, 2023,” emphasize the importance of growth potential and a revenue-earning record over the past five years.
According to the regulations, companies intending to list on the SME Market Segment are not required to be profitable initially. However, they must present a business plan demonstrating the potential to achieve profitability. The plan should be credible, and auditable, and showcase verifiable growth prospects, including a significant asset or a contracted business opportunity aligned with their core operations.
The NSE has grappled with a prolonged listing drought, with the last IPO occurring in October 2015 when the Stanlib Fahari REIT (now ILAM Fahari I-REIT) was listed. The stringent listing requirements and high fees have been cited as barriers to entry, discouraging potential issuers. Michael Odundo, a research analyst at the Standard Investment Bank, notes that challenging circumstances often prompt companies to delay listings, contributing to the prolonged IPO drought.
In addition to relaxing profitability requirements, the new regulations broaden the scope of eligible entities to issue securities, now including limited liability partnerships. Previously, only companies were permitted to issue securities. The revamped rules also consolidate the three market segments into two categories: the Main Investment Market Segment and the SME Market Segment.
As the government prepares to privatize 11 state-linked entities with an asset value exceeding Sh200 billion, including the Kenya Pipeline Company, Kenyatta International Convention Centre, and Kenya Seed Company, these regulatory changes are expected to stimulate IPO activity. Notably, the last successful government privatization was the Safaricom IPO in 2008.
Large state-controlled firms listed between 2003 and 2008, such as KenGen, Kenya Reinsurance, and Mumias Sugar, stand as examples of successful public offerings during that period. The amendments come at a critical juncture, aligning with the government’s privatization efforts and aiming to inject vitality into the NSE.
Photo ( NSE)
29th November, 2023
Delino Gayweh
Serrari Financial Analyst
