SMEs: Preparing to list on the Growth Enterprises Market Segment
In Kenya, companies can list on either of the four available market segments of the Nairobi Securities Exchange (“NSE”) namely;
- Main Investment Market Segment – suitable for financially larger companies with over KES 50M fully paid up shares and assets valued of KES 100M or more;
- Alternative Investment Market Segment - suitable for medium-sized companies that have at least KES 20M in assets and KES 20M of fully paid up share capital at the time of listing;
- Fixed Income Securities Market Segment - designed to incorporate listing and secondary market trading of fixed income securities, mainly debenture stock, corporate and government/treasury bonds for organisations requiring debt finance for projects, expansions and working capital; and
- Growth Enterprises Market Segment (“GEMS”).
GEMS was introduced by the Capital Markets Authority in 2013 to accommodate and aid small medium size enterprises (“SMEs”), as key drivers of the Kenyan economy, in their financial growth. SMEs being less structured and in most circumstances without adequate assets are often considered by investors and lenders as high-risk borrowers and/or businesses thus the introduction of GEMS to cater for the needs of such companies within a regulated environment was a welcome idea.
Even so, six years following its introduction and despite the minimal listing requirements under GEMS, the number of SMEs applying to list has been relatively low prompting the Cabinet Secretary for National Treasury, Hon. Henry Rotich, in his 2019/2020 budget proposal to introduce an amnesty on the tax penalties and interest, on any outstanding taxes, for two years prior to the listing to encourage SMEs to list and update their tax records. In his 13th June 2019 statement, he attributed the low listing rate to the potential back taxes that the businesses may be facing.
If the proposal is actualized, we are likely to see more SMEs listing on this market segment. This article offers a summary of mandatory actions provided by the Companies Act, 2015, the Capital Markets Act, Chapter 485A laws of Kenya and the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 to be taken by an SME in preparation for listing on GEMS.
A company looking to list under this segment ought to:
- Convert to a public company
Companies Act prohibits a private company limited by shares or guarantee from offering any of its securities to the public. A private company must therefore be converted into a public company before the offered securities are allotted. In the alternative and as part of the terms of the offer, the company must undertake to convert itself into a public company within six (6) months after the day on which the offer is made to the public.
In addition, under the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 a company seeking to list on GEMS must:
- have at least KES 10M of fully paid share capital;
- have at least one hundred thousand (100,000) issued shares;
- amend its memorandum and articles of association to have its shares freely transferable and not subject to any restrictions including pre-emptive rights;
- have a board composed of five (5) directors having undergone an induction programme six (6) months prior to listing;
- have fifteen percent (15%) of its issued shares available to the public;
- be in operation for at least one year with adequate working capital; and
- be solvent.
- Nominate an advisor by written contract
It is mandatory for a company preparing for listing on GEMS to nominate by written contract an advisor who shall among other things:
- advise and guide the company on the application and listing requirements of GEMS;
- manage the submission of the listing statement and all other documentation to the NSE and ensure its completeness and correctness before submission;
- be responsible for ensuring that the offer of securities is made in accordance with the provisions of the Capital Markets Act and its Regulations;
- take all reasonable steps to brief the company’s board of directors as to the nature of their responsibilities under the listing requirements, other applicable regulation and the general nature of their obligations in relation to shareholders; and
- assume the overall role of coordinating the various professionals involved in the process to ensure a smooth preparation and completion of the listing process e.g. lawyers, bankers and accountants.
- Prepare a listing statement for the Capital Markets Authority’s Approval
A listing statement is an information document to be prepared by companies seeking to list on GEMS to attract potential investors. The statement should disclose all necessary information about the company without making any false statements.
Other than the general details of a company such as name, list of directors, shareholders, share capital and details of the company’s registered office, a listing statement should include:
- Recent developments and prospects of the company including business trends, forecasts and assumptions upon which the company has based its forecast.
- Directors, major shareholders and employee (senior management) information, including directors’ interests and details of founding shareholders if the company was established as a family business.
- Financial information of the company including an accountant’s report confirming the company’s compliance with the financial disclosures required under the Regulation. The accountants report must be able to provide a potential investor with a clear picture of the assets and liabilities, financial position, profits and losses, and the financial prospects of the issuing company.
- Allotment/Allocation policy. If practicable, the listing statement ought to include a policy on which allotments of securities to the public shall be made. As a requirement, the policy must reserve at least 40% of the ordinary shares that are subject to an initial public offer (“IPO”) and subsequent listing for investment by local investors. Where the allocation reserved for local investors is not fully subscribed for by local investors, the company, with the prior written approval of the Authority may allocate the remaining shares to foreign investors.
- The listing statement must also indicate the nature of securities being offered and rights attaching to those securities.
If you would like further information or guidance on listing on the GEMS segment, please do not hesitate to contact us.