sme exchange - diversification in kenyas capital markets

8/3/2019 SME Exchange - Diversification in Kenyas Capital Markets

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Mrs. Stella Kilonzo, MBSChief Executive Capital Markets Authority

Coast Province Investment Conference

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RD

November, 2011

SME Exchange: Diversificationin Kenyas Capital Markets


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CAPITAL MARKETS AGENDA

Kenyas capital and financial markets have

registered phenomenal growth and developmentin virtually all parameters.

Various reforms initiated towards deepening of

the market with particular emphasis on: modernization of market infrastructure

increased awareness

enabling policy framework fiscal incentives

developing new products such as the GrowthEnterprise Market Segment (GEMS) at the Exchange

for SMEs


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SMEs suffer from lack of access to appropriate funds (in termand cost) from both the money and capital markets. They

suffer from:

Being regarded by creditors and investors as high-riskborrowers due to insufficient assets and low capitalization,vulnerability to market fluctuations and high mortality rates;

Information asymmetry arising from their lack of accountingrecords, inadequate financial statements or business plans

SMEs are less structured than large scale organizations and are

usually dominated in terms of management style and othercharacteristics by the promoter. They are therefore perceived ashigher risk.

High administrative/transaction costs of lending or investingsmall amounts which do not make their financing a profitablebusiness.

THE CAPITAL-RAISING PROBLEMS FOR SMES


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THE CAPITAL-RAISING PROBLEMS FOR SMES

SMEs cannot borrow significant funds from banks. Banks regard themas too risky and with too little collateral to support a loan.

Their owners are often already fully invested in the company, oftenhaving borrowed from family and friends as well.

Trade creditors and suppliers might give them some leeway, but intime they too must be paid.

Shares in a private company are not transferable, except underexceptional circumstances, which hardly conforms with an investorslong-term desires.

SME might already have a number of small shareholders; usually

family, friends, and employees leaving them little for raising significantcapital from new investors while staying below the 50 shareholdermaximum.

Consequently, raising capital while staying within the limits of private

company status is a much too limited course for many SMEs.


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Part A Part B

Requirement Criteria for MIMS Criteria for AIMS

Size: Share Capital Min. authorized issued andfully paid up share capital ofKshs. 50.0 million.

Min. authorized issuedand fully paid up sharecapital of Kshs. 20.0million.

Size: Net Assets Immediately before the IPOshould not be less thanKshs. 100.0 million.

Immediately before theIPO should not be lessthan Kshs. 20.0 million.

Track Record,

profitability and futureprospects

Profits after tax attributable

to shareholders in at least 3of the last 5 completedaccounting periods prior tolisting.

Must have engaged in

the same business for amin. of 2 years, 1 ofwhich should reflect aprofit with good growthpotential.

MAIN INVESTMENT MARKET SEGMENT (MIMS) AND THEALTERNATIVE INVESTMENT MARKET SEGMENT (AIMS).


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PERCEIVED DOWNSIDES

Perceived downsides especially for Medium

Enterprises in these markets has been:

Compliance

Loss of control & ownership

Reporting obligations

Approval process EGM/ AGM

Listing costs

This could be addressed through the introduction

of a Market that addresses these issues

ESTABLISHMENT OF A GROWTH MARKET


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ESTABLISHMENT OF A GROWTH MARKETENTERPRISE

The Authority in conjunction with the Nairobi Securities

Exchange (NSE) and the Central Depository andSettlement Corporation (CDSC) are jointly embarking onthe establishment of an SME market at the exchange.

To cater for Micro, Small and Medium Sized Enterprises

(MSME) sectors which is one of the key drivers of Vision2030, destined to play an effective role as an engine foreconomic growth, poverty eradication and unemployment.

SMEs are the main source of economic growth indeveloped and developing countries such as Kenya.

Responsible for about 80% of employment.

Contributes about 40% to GDP.

ESTABLISHMENT OF A GROWTH MARKET


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ESTABLISHMENT OF A GROWTH MARKETENTERPRISE

The market segment allows existing companies to diversify

their ownership and introduce new investors andmanagement capacity

Founding owners have an opportunity to realize theirinvestment through disposals to new investors (subject torestrictions)

The market segment creates opportunities to facilitate theraising of long term, affordable, risk capital for SMEs.

Maintains high levels of disclosure and transparency tosecure investor interests

The free float and number of shareholders after listing

should facilitate liquidity. 9


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BENEFITS OF AN SME MARKET

Creates a market for shares of SMEs, broadening theirshareholder base and potentially giving existingshareholders an exit route

Obtains an objective market value for SMEs through

market price discovery

Aids EAC domiciled companies in raising their profileswith a view to expanding operations in Kenya and therest of the East African Community

Rewards and encourages employees of SME firmsthrough the introduction of share incentive schemes.


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OPPORTUNITIES FROM EQUITY FINANCING

Provides SMEs with equity financing opportunities

to grow their business from expansion toacquisition.

Equity Financing will lower the debt burden leading

to lower financing costs and healthier balancesheet.

Increased information availability provides

immense opportunities for investors to identify andinvest in good SME companies at early stages.

Helps unleash the valuation of companies and in

the process create wealth for all the stakeholders.


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OPPORTUNITIES FROM PRIVATE EQUITY

Initiating a dedicated exchange platform for SMEs will

lead to diversification of resources of finance and helpbuild a bridge between the SMEs, Private Equity and theVenture Capital by providing an exit route.

A key consideration of strategic investors into privatecompanies will be the availability of a mechanism foreffective exit within a 5 8 year investment cycle

Transparent market price discovery and opportunities for

sale to diversified investors instead of a single investorsprovides greater flexibility in exit timing


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OPPORTUNITIES FOR PRIVATE EQUITY

Opportunities to invest in the fastest growingcompanies in EastAfricas largest economy.

Entry into the fastest growing sectors in the economy.

Free movement from one segment to another as longas firm meets requirements.

Capital Market will help distribute risk more efficientlyby transfer of risk to those who are best able to bear it.

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LISTING REQUIREMENTS

Exchange to carry responsibility for first line assessment

and approval for listing by introduction Financial Requirements- Paid up share Capital of Ksh.

10 million.

Low minimum number of shares: 100,000 issued shares

Free float of at least 15% of the issued shares to be

available to ensure liquidity.

Corporate Governance Requirements (board

composition, audit and management accounts). Continuing Reporting and Compliance Requirements

Supported by Nominated Advisor in ensuring compliance

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ROLE OF NOMINATED ADVISORS

A Nominated Advisor will be responsible to the Exchange

for:

assessing the appropriateness of an applicant for GEMSlisting

advising and guiding an SME company on itsresponsibilities under the GEMS Rules for Companies.

NOMADS will be subjected to vetting and registration bythe exchange.

The Nominated Advisor's role is of particular importanceto the successful operation of alternative market.

A nominated advisor acts as a coordinator between theissuer and the exchange all the times and is responsible

for ensuring compliance.


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CONSIDERATIONS

Graduation to the main market to be made easy through:

Streamlined Process

Prescribed timelines by which the approving authority has torespond to applications;

Ensuring that SMEs listed on SMEx are eligibleinvestments for pension fund schemes and insurance

companies. An educational program will be developed by the Capital

Markets Authority, and the Securities Exchange on whichthe market segment is situated.

Research coverage provided by the NOMAD to boost theprofile of the SMEx

Existing incentives for the main market to beadvanced to the SMEX market


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Tax amnesty on past omitted income for newly listed companies,

provided they make full disclosure of assets and liabilities andundertake to pay all future taxes;

Expenses related to issuing shares to the public fully taxdeductible;

Stamp Duty and VAT on transfer of listed securities exempted;

Law amended to reduce listing fees by 50% (0.3% to 0.15%);

Preferential corporate tax treatment for listed company from theusual 30% to as little as 20%for for the first five years after listingthose who release to the public up to 40% of their sharesthrough IPO;

New and expanded share capital for companies approved forlisting or already listed exempt from stamp duty;

Cost of rating made tax deductible in order to encourage creditrating;

EXISTING TAX INCENTIVES- FOR ISSUERSto be advanced to the GEMS market


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CURRENT STATUS

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Public exposure of the SME regulations closed onSeptember 20, 2011.

We are now in the process of incorporating stakeholders

comments into the framework.

Regulatory framework is subject to gazettement by theMinister.

Launch is expected by June 2012.

INVESTOR PARTICIPATION


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INVESTOR PARTICIPATION

Reviewing and assessing the disclosures in the Listing

Statement to determine whether investment is attractiveand meets their needs

Purchase of listed shares on the GEMS segment

All listed securities are deposited in the central depository

Trading is on the Automated Trading System (ATS)

Investors will need to open a CDS account to trade

Companies in first instance to be listed by Introduction(not an IPO)

Capital raising may be done post listing through rightsand additional issues

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THANK YOU!

sme exchange - diversification in kenyas capital markets

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