The good and bad of listing

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BY ANTONY MUTUNGA

After years of trading shares with no physical trading floor, Kenya finally got a bourse when the London Stock Exchange (LSE) officials accepted to recognize the set-up of the Nairobi Securities Exchange (NSE) then known as the Nairobi Stock Market as an overseas stock exchange in 1953.

Even though the bourse was used by the East African Community (EAC) – Kenya, Uganda and Tanzania – a majority of the listed public sector securities were from Kenya. For example, by 1968 the number of listed public sector securities stood at 66% whereby 45% were for the Kenyan government while the Tanzanian and Ugandan government had 23% and 11% respectively.

However, this did not last as in 1975 the EAC collapsed leading to the delisting of companies in Uganda and Tanzania. In 1991, the NSE registered as a private company limited by shares but this was changed in accordance with the 1994 Capital Markets Authority (CMA) Act, which turned the bourse into a company limited by guarantee. As a result, this saw the number of stockbrokers increase by seven. The bourse continued to grow as more companies became listed over the years. Safaricom shares, for instance, started trading at the bourse in 2008 where its IPO increased the number of shares listed in the bourse from 15 billion to over 55 billion shares.

Despite the number of shares listed in the bourse having increased over the years, the number of listed firms has stagnated when compared to the number of organizations in the country. There being over 200 companies in Kenya, it is quite surprising that only about 65 entities are listed in the bourse with a total market capitalisation of Sh2.8 trillion ($27.90 billion). To make matters worse, the number of listed companies has stagnated in the range between 50 and 70 companies for a long time.

Even though there are many companies that are successful in the country, only a few are listed. Those listed include Safaricom, KCB Group, Kenya Airways and Kenya Power. However, other equally successful firms such as Airtel Kenya, Bidco, Brookside, Chandaria Industries and Doshi Group have not joined the bourse.

For the companies that have joined the bourse so far, it has been so as to be able to tap into the merits that are accrued as a result of being listed. For starters, being listed on the NSE gives a company some recognition. Listing, in a sense, puts a company on the business map. It also attracts media exposure that is an incentive for investment.

On the other hand, a listed company has access to long term capital as the bourse serves a valuable source. This can be accredited to the fact that through the bourse, a company is able to raise capital through initial public offer, introduction, cross listing and reverse listing hence being able to finance its plans for expansions, the establishment of an appropriate financial structure and the enhancement of its competitiveness.

Additionally, apart from dealing with common shares a company raises more capital through the issuance and listing of other securities; preferred shares, debentures, convertible debentures and warrants. According to Paul Muthaura, chief executive of the Capital Markets Authority (CMA), it is cheaper for companies to raise capital by listing their shares rather than doing it via traditional means such as financing from banks and private entities.

A listed company also has the advantage of access to low cost of credit. This can be accredited to the fact that the company becomes an open book thus financial institutions are able to determine its creditworthiness. In the long run, this increases the borrowing power of the company as well as enhancing its bargaining power. As a result, financial institutions tend to be inclined to reduce the cost of borrowing for listed companies.

Being listed at the bourse also increases the liquidity of the listed securities. As a result of being part of an organized exchange, shareholders are able to find buyers easily as their stock becomes more marketable. This is because the market value of a company listed in the bourse is easily determined and its shares can also be used as security for a loan. Listed companies also enjoy some tax advantage such as lower corporate taxes.

However, despite the many benefits companies get from listing in NSE there are a few challenges they face as well. The procedure for listing in the bourse, for example, is considered to be long and tedious by most companies. A company has to meet all the exchange requirements first then apply with the CMA, once the authority is approved then the company can issue a prospectus to inform the public that the shares are up for sale. After the shares have been subscribed, next comes the floatation process then after the shares are sold in the process, the company is listed in the exchange.

Besides, there are also the issue of the costs incurred. Starting at the initial stage, companies are faced with costs such as underwriting and registration fees. Additionally, listed companies are also faced with other yearly costs such as exchange fees, auditing costs as well as costs for certification and dissemination of accounting information. As a result, most companies keep off listing as these costs end up being too high.

Even though these have resulted in companies not listing, the main reason as to why a large number of them have kept off has been the regulatory environment which requires the company that wants to list to disclose some information such as ongoing research and development projects as well as adhere to the bourse’s transparency and corporate governance rules. A majority of the companies feel like they are giveing up a percentage of their ownership and control.

Some also feel like that going public they would lose their competitive edge as they are obliged to disclose some information that their competitor can pick up. “Public disclosures that will accompany a listing are another factor making some firms reluctant as they fear putting out such information risks revealing business secrets to their competitors,” said Mr Muthaura.

This has especially affected companies that are owned and governed by families. Alexander Owino, consultant and Financial sector specialist, says that blame can be laid squarely at corporate governance weaknesses and the fear of public transparency and accountability to shareholders

According to a PricewaterhouseCoopers’ (PwC) 2017 Africa Capital Markets Watch report, no company in Kenya had listed in the NSE through an IPO for the past two years.

By listing with the bourse, a number of companies especially the small companies have a lot to gain not only in terms of access to capital but also in attracting foreign investors. There is a need to create awareness on the benefits that companies can accrue by listing. There is also a need to make the procedure for listing less tedious and to reduce the costs incurred.

Companies, on the other hand, also need to take the example of Safaricom, which has a market capitalization of Sh1.22 trillion, to be sure that after listing they can still make major profits and keep their competitive advantage. There are many companies in the country that meet the requirements needed to join the bourse, it is time for them to take the next step and enjoy the benefits that come with being listed.