Capital markets the way to go for SMEs growth

Nairobi Securities Exchange. FILE PHOTO | NMG

By AMISHA GUPTA
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Summary

• With the prevalence of the Covid-19 pandemic, most companies have been affected, and particularly the micro, small and medium enterprises in Kenya were hardest hit.
• This has led to an unprecedented high number of job losses and closure of many businesses.
• Permanent capital is a customised shock absorber funding that has numerous benefits.

Every small and medium enterprise (SME) should be able to access capital markets for permanent and sustainable capital and shareholder wealth creation.

With the prevalence of the Covid-19 pandemic, most companies have been affected, and particularly the micro, small and medium enterprises in Kenya were hardest hit. This has led to an unprecedented high number of job losses and closure of many businesses.

Permanent capital is a customised shock absorber funding that has numerous benefits. It would have served best in this pandemic period and in the event of any other catastrophe that may hit the country some day in the future. They say prevention is better than cure. Capital raised through the capital market is long-term and investors share in the trouble of the companies they have invested in as they await better times.

Times are even better for the SMEs to take advantage of the initiatives that have been presented by the Kenyan government. The Post Covid-19 Economic Recovery Strategy for instance has outlined initiatives to support SMEs raise capital. Some include crowd funding; facilitating county governments to raise funding through market-based products like county and infrastructure bonds; promotion of other capital raising initiatives such as issue of Shariah compliant products;margin trading; trading of securities through mobile devices, access to initial public offers (IPOs) using phones and access to collective investment schemes through mobile phone.

Others include policy, legal and infrastructural reform for state owned entities and county based corporations. Besides these, there are plans to amend the Public Procurement and Disposal Act to provide clarity on transfer of public assets into special purpose vehicles. There is also a proposed amendment in the capital markets regulations that seeks to enable loss-making state owned enterprises raise capital using IPOs with government guarantee and to reduce free float of listed companies from 25 per cent to five per cent.

Furthermore, the market offers new and better products which include off balance sheet financing as well as secured IPOs for SMEs or restricted public offers (RPO).

For SMEs to thrive in the capital markets, meeting investor expectations is key. How does an SME deliver investor expectations in the capital market?

The Articles of Association for businesses under the Companies Act is one of the ways. The model articles form a solid basis. However, they must be supplemented with at least a dozen new clauses so that roles, responsibilities, consequences between shareholders, directors, executive management, senior officers and employees is institutionalised and actionable in such a manner that long-term corporate sustainability is boosted. The clauses should also include the Treasury shares and virtual meetings clauses.

Selection of directors should consider multi-tribes, gender, expertise, all being subject to rigorous high-performance board evaluation.

Secondly, details of the shareholders’ agreement serve in gaining investor confidence. No longer should any business commence or continue unless specific clauses are signed off in this confidential side-document. There are policies that should be considered too. These policies include ethics policy, leadership policy, director appointment policy, equity value augmentation policy, debt service cover ratio policy, deceased dominant shareholder policy, shareholder and director fraud and theft policy, polygamy policy, minority shareholders’ policy, complaints policy and dispute resolution mechanism policy.

Lastly, the leadership style adopted in an SME serves in strengthening investor confidence. Management by definition refers to controlling a group or a set of entities to accomplish a goal. Leadership on the other hand refers to an individual's ability to influence, motivate, and enable others to contribute toward organisational success. Influence and inspiration separate leaders from managers, not power and control.

In conclusion, it is noteworthy that the market value of a business cannot just be based on finances and valuation methodologies. To gain more insights into a specific business, investors are also interested in intangibles like strategy, brand, innovation, systems integration and collaboration.

Mr Gupta, Vice Chairman, Kenya Association of Stockbrokers and Investment Banks