Bourses falter in efforts to persuade SMEs to list shares

The Nairobi Securities Exchange. PHOTO | FILE 

By JAMES ANYANZWA

In Summary

• Stock exchanges in East Africa experiencing difficulties to convince small and medium-sized companies to sell their shares to the public as they not ready for the regulations and public scrutiny.
• The biggest challenge is that family-owned businesses are reluctant to undergo scrutiny.
• Firms earnings and cash investment dwindling triggered by harsh economic conditions as players are not compliant to the rules.

East Africa’s stock exchanges are finding it difficult to convince small and medium-sized companies to sell their shares to the public, as many of them are family-owned and not ready for the strict regulations and public scrutiny.

Nairobi Securities Exchange and Dar es Salaam Stock Exchange have listed just five companies each since the launch of the SME trading platforms five years ago, while Rwanda Securities Exchange and Ugandan Securities Exchange have not attracted any listings to their SME segments.

Executive director of the Rwanda Capital Markets Authority Robert Mathu said family-owned businesses are reluctant to undergo scrutiny.

“In as much as the requirements for SME listing are lighter, we expect some very basic fundamental things to be put in place including a minimum of three directors of which 30 per cent (one director) must be independent,” Mr Mathu told The EastAfrican.

“We have been talking to the SMEs. The biggest challenge is change of behaviour, but this is inevitable because we are a capital market. They need to open up to people who want to give them money,” he added.

Challenges

Ugandan Securities Exchange launched its Growth Enterprise Market Segment (Gems) in 2013.

Charles Nsamba, the communications manager at the Uganda Capital Markets Authority, said the challenge has been the informal nature of the SMEs and the requirement for proper corporate governance structures and book keeping standards.

“We have come to the realisation that this needs to be addressed, and in the 10-year master plan that is to be launched next month there is a proposal to streamline and simplify requirements for corporate issuance so that it’s clear what one requires for the main market and for the growth market,” said Mr Nsamba.

The DSE, which launched its Enterprise Growth Market (EGM) in 2013, is also struggling to convince SMEs to sell their shares to the public.

DSE chief executive Moremi Marwa told The EastAfrican that the low turn-out on the EGM is due to the legacies of family-owned businesses, lack of awareness, lack of enough nominated advisors (currently need four), and limited corporate actions such as dividends and bonus issues after listing.

The five companies listed so far are valued at Tsh117.55 billion ($52 million) on the EGM. These are Mkombozi Commercial Bank, Maendeleo Bank, Swala Oil and Gas, Yetu Microfinance, and Mwalimu Commercial Bank.

READ: Tanzania's Magufuli pushes for listing of mining firms

Poor performance

However, even as the bourses entice SMEs to the stock market, the performance of the already listed firms is wanting. The NSE and financial advisors are on the spot for the financial pain facing investors who put their money into the listed SMEs.

With the downturn in the market, the share prices of some SMEs have fallen to record lows leaving investors counting paper losses, with questions about whether the listing prices of these firms took into account all the risks associated with smaller companies.

READ: In 2016, it was a poor showing on the NSE

NSE chief executive Geoffrey Odundo said that the exchange supervises financial advisors to assess their compliance, and attributed the poor performance of the firms listed on the Gems to the general bear run on the market triggered by harsh economic conditions.

Mr Odundo said it was the responsibility of the board of directors of listed companies to ensure compliance with the rules.

“The performance of a listed entity is determined by various factors such as the financial and economic environment under which a company operates,” he said Chief executive of AIB Capital Paul Mwai said the valuation did not consider all factors.

“The valuations at which some of these companies were brought to the market were not reflective of their risks. Companies that come to the Gems market are high risk because they are still growing, they have not matured,” he said.

READ: East African capital markets advisory centre to boost SMEs

The undesirable

Last year, chief executive of the stock agent Investax Capital Ndindi Nyoro said many of his clients had lost money in the Gems.

He cited real estate developer Home Afrika Ltd and oil and gas firm Atlas Development as two counters that have seen investors lose money.

“There was a mismatch between what we were told and the reality,” Mr Nyoro said, adding that Atlas Development’s decision to divest from its core business of offering logistics to the oil and gas sector to instead pump money into a Nigeria-based gaming company, sent the wrong message to local investors.

The share price of Atlas, which has now been suspended from trading on the Gems for 90 days, has dropped by more than 90 per cent to Ksh1.05 ($0.01) per share, from the offer price of Ksh11.50 ($0.11) per share.

READ: Atlas suspended from Nairobi bourse as its woes pile up

Home Afrika Ltd, which listed on the exchange in 2013, has seen its stock tumble below the par value of Ksh1 ($0.01) to trade at Ksh0.8 ($0.008) per share compared to the offer price of Ksh12 ($0.12) per share. The firm sacked two of its chief executives within two years of its listing, as earnings dropped and cash for investment dwindled.

Flame Tree Holdings, a manufacturer and distributor of plastic tanks, cosmetics and snacks, has lost 32 per cent of its value since listing on the NSE in 2014.

Gainers
On the other hand, companies such as Kurwitu Ventures and the leather footwear and accessories retailer Nairobi Business Ventures (NBV) saw their share prices increase by 20 per cent and 44 per cent respectively.

But analysts say Kurwitu’s lack of clear-cut investment plans and NBV’s increased borrowing that stood at Ksh66.46 million ($664,600) in March 2016 sent worrying signals to investors.

At the time of listing in November 2014, Kurwitu said it would invest Ksh100 million ($1 million) in 2015, Ksh150 million ($1.5 million) in 2016, and Ksh200 million ($2 million) in 2017, but so far the company has not made public any investment transaction and has not traded on the exchange since listing its shares.

Home Afrika is seeking an additional Ksh5 billion ($50 million), in the form of 40 per cent equity and 60 per cent debt, to complete its housing projects after failing to raise Ksh900 million ($9 million) through a bond issue in 2015.