How to list a company on the Nairobi Securities Exchange (NSE)

Listing a company in Kenya involves placing shares on the Nairobi Securities Exchange (NSE). Contrary to common perception, listing shares on the NSE doesn’t always involve selling shares to raise capital but may be done to enhance corporate governance as it brings in higher levels of scrutiny and hence higher compliance levels are demanded. Selling shares to raise capital is referred to as an Initial Public Offer (IPO), the amount being raised from the issue is known in advance and when no capital is being sought in the market it is referred to as a Listing by Introduction.

Reasons companies choose to get listed on the NSE

There are many reasons that a company can choose to list on the Nairobi Securities Exchange other than raising capital which include: 

1. To gain access to the capital markets in the future: The capital markets offer a ready form of funding for companies, enabling them to embark on growth and expansion plans or to fund their working capital with greater ease.
2. For share price discovery: Listing will allow a company’s shares to trade on an official stock exchange, with the price determined by market demand and supply forces. This will allow for generation of a market determined valuation for the company.
3. To increase transparency and disclosures to the public: When a company lists, it is subject to regulation and hence will be required to disclose certain pieces of useful information to the investing public.
4. To improve on corporate governance practices: Listed companies are expected to adhere to corporate governance practices as prescribed by regulation.
5. To enhance the company’s image: Listed companies are usually well known by the public and viewed as more transparent and credible, having passed the regulator’s keen tests. This will serve to boost confidence in the company and open up the doors to a ship load of opportunities it can explore.
6. To provide existing shareholders liquidity of their shares: Once shares of a company are listed on an exchange, shareholders have an avenue to exit their shares at will to the investing public in the capital markets.
7. Make it easier for it to cross-list on other exchanges: Once a company has already successfully listed on one stock exchange, it is perceived to have already been through scrutiny and due diligence procedures, and has gone through the whole listing process once, hence the process of listing on another exchange will be less tedious.

NSE market segments in which companies get listed

The NSE market has grown since its establishment in 1954. The most recent developments are the operationalization of the GEMS, the introduction of the derivatives trading, REITs and exchange traded funds.  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 was introduced to give SMEs an opportunity to access the capital markets and grow their businesses.

a. Main Investment Market Segment (MIMS)

This is the main segment of the NSE where most companies are listed. It is suitable for bigger companies that have been around for a longer period of time as it requires submission of at least 5-years of audited financials, 3 of which should be profitable years; Ksh 50 million worth of fully paid up share capital and Ksh 100 million in assets.

b. Alternative Investment Market Segment (AIMS)

This market segment is better suited for medium sized companies that have at least Ksh 20 million in assets and Ksh 20 million of fully paid up share capital at the time of listing.

c. 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.

d. 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 no minimum firm asset value and profitability record required, submission of audited accounts for just the year that precedes the year of listing, and a minimum of Ksh 10 million in paid up share capital.

Ways in which companies can get listed on the various market segments

Here is a summary of ways in which companies can get listed on the various segments of the market.

a. Initial Public Offer (IPO)

This is the most common type of listing and one which is commonly misconstrued as the only way in which a company can list on a stock exchange. An IPO 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.

b. Listing by Introduction

This type of listing occurs when a company takes its existing shares and lists them on an exchange. Given that said company is listing shares that had already been fully paid for, the aim of listing by introduction is not to raise capital immediately, but to be able to do so at a later date when the company is in need of capital. It 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.

c. Cross-listing

This occurs when a company that is already listed on one stock exchange decides to list on another stock exchange to have a larger scope of access to capital from different jurisdictions and different investors.

d. Reverse listing

This is a rare kind of listing strategy whereby 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.

Approval for listing

The Capital Markets Authority grants approval for listing for all public offers and listing of securities on any securities exchange in Kenya. A Securities Exchange may approve the listing of a security on a Growth Enterprise Market Segment if that security is not offered to the public and the listing is by way of introduction.

Important considerations prior to listing

Here are the considerations to take prior to listing.

a. Appointment of Transaction Advisor or a Nominated Advisor

1. Any company proposing to offer its securities to the public or a section of the public is required to appoint a transaction adviser who shall be responsible for ensuring that the offer of securities is made in accordance with the Act and regulations issued there under (Reg 5A. (1)).
2. An issuer seeking to be listed on the Growth Enterprise Market Segment is required to appoint a Nominated Adviser by a written contract and shall ensure that it has a Nominated Advisor at all times. The Nominated Advisor is expected to advise and guide an issuer on the application of listing requirements of Growth Enterprise Market Segment and manage the submission of the listing statement and all other documentation to the Securities Exchange and ensure its completeness and correctness before submission. (Reg 10A. (1)).

b. Corporate governance considerations

1. The company must have at least a third of the Board as non-executive directors.
2. The company should establish an audit committee in compliance with guidelines on corporate governance issued by the Capital Markets Authority.
3. The Chairman of the company shall not hold such position in more than two listed companies at any one time, in order to ensure effective participation in the board.
4. The chief financial officer and the head of accounting department of shall be members of the Institute of Certified Public Accountants established under the Accountants Act.
5. The company secretary of every issuer shall be a member of the Institute of Certified Public Secretaries of Kenya established under the Certified Public Secretaries of Kenya Act.
6. The auditor of the company should be a member of the Institute of Certified Public.
7. Accountants and shall comply with the International Standards of Auditing.

c. Other pre-listing considerations

1. The company should review the Memorandum and Articles of Association to align them with the guidelines on corporate governance practices by Public Listed Companies in Kenya as set out by the Capital Markets Act.
2. The company should have a company register who will maintain the register of shareholders of the company.
3. The Articles of Association of the company must be amended in order to comply with the Central Depository (Operation) Rules and the Central Depositories Act, 2000 in regards to provisions relating to immobilized securities.

d. Other listing information (Applicable to all market segments)

1. Identity of directors, senior management and advisers (i.e., persons responsible for the information disclosed).
2. Offer statistics and expected timetable.
3. Information on the issuer.
4. Operating and financial review and prospectus (the recent development and prospects of the group).
5. Directors and employees.
6. Major shareholders and related party transactions.
7. Financial information. 
8. The offer and listing. 
9. Vendors.

Eligibility requirements for public offering of shares and listing

Requirement	Criteria for the main investment market segment	Criteria for the alternative investment market segment	Criteria for the growth enterprise market segment
Incorporation status	A public company limited by shares and registered under the Companies Act (Cap. 486 of the Laws of Kenya).
Share capital	Minimum authorized issued and fully paid-up ordinary share capital of fifty million shillings.	Minimum authorized issued and fully paid-up ordinary share capital of twenty million shillings.	The issuer shall have a minimum authorized and fully paid-up ordinary share capital of ten million shillings; and the issuer must have not less than one hundred thousand shares in issue.
Net assets	Net assets immediately before the public offering or listing of shares should not be less than one hundred million shillings.	Net assets immediately before the public offering or listing of shares should not be less than twenty million shillings.	N/A
Free transferability of shares	Shares to be listed shall be freely transferable and not subject to any restrictions on marketability or any preemptive rights.
Availability and reliability of financial records	The issuer shall have audited financial statements complying with International Financial Reporting Standards (IFRS) for an accounting period ending on a date not more than four months prior to the proposed date of the offer or listing for issuers whose securities are not listed at the securities exchange, and six 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.		N/A
Competence and suitability of directors and management	At the date of the application, the issuer must not be in breach of any of its loan covenants particularly in regard to the maximum debt capacity. As at the date of application and for a period of at least two years prior to the date of the application, no director of the issuer shall have any petition under bankruptcy or  insolvency laws in any jurisdiction pending or threatened against any director (for individuals), or any winding-up petition pending or threatened against it (for corporate bodies) – any criminal proceedings in which the director was convicted of fraud or any criminal offence, nor be named the subject of pending criminal proceeding, or any other offence or action within or outside Kenya; or been the subject of any ruling of a court of competent jurisdiction or any government body in any jurisdiction, that permanently or temporarily prohibits such director from acting as an investment advisor or as a director or employee of a stockbroker, dealer, or any financial service institution or engaging in any type of business practice or activity in that jurisdiction. The issuer must have suitable senior management with relevant experience for at least one year prior to the listing, none of whom shall have committed any serious offence in any jurisdiction that may be considered inappropriate for the management of a listed company. The issuer shall ensure continued retention of suitably qualified management during listing and no change of management for a period of twelve months following the listing other than for reason of a serious offence that may be considered to affect the integrity or be inappropriate for management of a listed company. The issuer must have at least a third of the Board as nonexecutive directors.		The issuer must have a minimum of five directors, with a least a third of the Board as non- executive directors as at the date of the application and for a period of at least two years prior to the date of the application:  Any petition under bankruptcy or insolvency laws in any jurisdiction pending or threatened against any director (for individuals), or any winding-up petition pending or threatened against it (for corporate bodies). Any criminal proceedings in which the director was convicted of fraud or any criminal offence, nor be named the subject of pending criminal proceeding, or any other offence or action within or outside Kenya. Been the subject of any ruling of a court of competent jurisdiction or any government body in any jurisdiction, that permanently or temporarily prohibits such director from acting as an investment advisor or as a director or employee of a stockbroker, dealer, or any financial service institution or engaging in any type of business practice or activity in that jurisdiction. The directors and senior management of an applicant must collectively have appropriate expertise and experience for the governance and management of the applicant and its business. Details of such expertise and experience must be disclosed in any listing particulars prepared by the applicant. “Appropriate expertise and experience shall mean at least one year experience in the applicant’s business, or where the applicant has no previous record, experience in similar line of business”.  One third of the directors must have completed the Directors Induction Programme (DIP) prior to listing and the remainder must complete the same within six months after listing. The issuer shall ensure continued retention of qualified management during listing and no change of management for a period of twelve months following the listing other than for reason of a serious offence that may be considered to affect the integrity or be inappropriate for management of a listed company.
Dividend policy	The issuer must have a clear future dividend policy.		N/A
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.	N/A
Solvency and adequacy of working capital	The issuer should not be insolvent. The issuer should have adequate working capital.		The issuer should not be insolvent. The issuer should have adequate working capital. The directors of the Issuer shall give an opinion on the adequacy of working capital for at least twelve 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 twenty-five per centum of the shares must be held by not less than one thousand 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 twenty-four 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 twenty per centum of the shares must be held by not less than one hundred shareholders excluding employees of the issuer or family members of the controlling shareholders. No investor shall hold more than three per centum of the twenty per centum 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 twenty-four months following listing and such undertaking shall be disclosed in the Information Memorandum.	The issuer must ensure at least fifteen per cent 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 three months of the listing date, if the securities available for trade by the public are held by less than twenty-five 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 and such undertaking shall be disclosed in the listing statement.
Listed shares to be immobilized	N/A	N/A	All issued shares must be deposited at a central depository established under the Central Depositories Act, 2000 (No. 4 of 2000).
Nominated Advisor	N/A	N/A	The issuer must appoint a Nominated Adviser in terms of a written contract and must ensure that it has a Nominated Adviser at all times.

Exception from listing regulations

The listing regulations shall not apply to:

a. The Government of Kenya

Securities issued by or on behalf of the Government of Kenya or a body corporate established under any written law in Kenya other than the Companies Act.

b. Private offers

For purposes of these Regulations, an offer of securities shall be regarded as private offer and accordingly shall be deemed not to be an offer to the public in Kenya if, to the extent that the offer is made to persons in Kenya under the following conditions (Reg 21. (1)): 

1. The securities are offered to not more than one hundred persons.
2. The securities are offered to the members of a club or association (whether or not incorporated) and the members can reasonably be regarded as having a common interest with each other and with the club or association in the affairs of the club or association and in what is to be done with the proceeds of the offer.
3. The securities are offered to a restricted circle of persons whom the offeror reasonably believes to be sufficiently knowledgeable to understand the risks involved in accepting the offer.
4. The securities are of a private company and are offered by that company to:
   • Members or employees of the company.
   • Members of the families of any such members or employees. The members of a person’s family are the person’s husband or wife, widow or widower and children (including stepchildren) and their descendants, and any trustee (acting in his capacity as such) of a trust the principal beneficiary of which is the person himself or herself, or any of those relatives.
   • The securities are offered to a restricted circle of persons whom the offeror reasonably believes to be sufficiently knowledgeable to understand the risks involved in accepting the offer.
   • The minimum subscription for securities per applicant is not less than Kenya Shillings one hundred thousand (Ksh 100,000).

Continuing obligations

1. Every issuer whose securities have been offered to the public shall comply with the continuing obligations specified in the Fifth Schedule with respect to the relevant market segment (Reg 19. (1)).
2. In relation to the continuing obligation to disclose information, an issuer shall make immediate public disclosure of information which might reasonably be expected to have a material effect on market activity in the prices of, its securities (Reg 19. (2)).
3. The information required to be disclosed under these Regulations shall be disclosed within twenty-four hours of the event, simultaneously to the Authority, the securities exchange at which the issuer’s securities are listed, if applicable, and to the public during non-trading hours of the relevant market segment (Reg 19. (3)).

Policy and tax incentives for the capital markets

1. Abolition of Stamp Duty payable on the share capital or increase in share capital of a company listed on the Nairobi Stock Exchange. (2007).
2. The legal costs and other incidental costs relating to the introduction of shares (when a company lists its share without raising capital) is corporate tax deductible. (2006).
3. Effective January 1st, 2003, newly listed companies pay a lower corporation tax of 25% (i.e., 5 percentage points lower than the standard corporation tax of 30%) for a period of 5 years following their listing. The new legislation applies to companies with who float at least 30% of their issued share capital to the public. (2002).
4. New and expanded share capital by listed companies or those seeking listing exempt from stamp duty. (2000/2001).
5.  Reduction of withholding tax applicable to dividend income arising from investment on listed securities for both local and foreign investors. Foreign 10%; Local 10% to7.5% to 5%. (1995/96/97).
6. Exemption of stamp duty and value added tax on the transfer of listed securities. (1995).
7. Costs of IPOs were made tax deductible. (1995).

Reasons why companies are opting not to get listed on the NSE

We have seen only a few equity listings on the NSE over the years, something that can be attributed to:

1. Long and tedious listing process: Companies have had challenges listing on the NSE due to the long and tedious process it takes to list on the exchange.
2. Costs incurred: Costs involved with an initial listing are the initial listing fee and payments made to all transaction advisors among others, and these are considered to a great extent by a company before the decision is made to proceed. At times, these costs may be too high especially for smaller companies.
3. Extensive regulation and scrutiny: Some non-listed companies shy away from listing on the stock exchange due to the harsh regulatory environment, extensive scrutiny and due diligence process and the extent of transparency and corporate governance that has to be adhered to by listed companies. This mainly affects the smaller companies that are majorly family owned and governed.