NAIROBI STOCK EXCHANGE NAIROBI STOCK EXCHANGE

1

NAIROBI STOCK EXCHANGE


A Presentation to University Students 2005

2

TABLE OF CONTENTS

What is a Stock Exchange What are share and bonds Capital Markets Structure The NSE Market Segments Listing in NSE Eligibility Criteria for Listing The Continuous Listing Obligations

3


What is a Stock Exchange?Role and Functions.What we deal with.

4

What is a stock exchange?

A Stock Exchange is a market where:-

i. Institutional and retail investors can buy and sell

securities. The price of these securities varies

according to supply and demand.

ii. Through which companies, multilaterals,

parastatals, SPV’s, government and local

authorities can raise funds for expansion and

development by issuing equity and debt

securities to the public.

5

Stock Exchanges Promote a culture of thrift, or savings.Stock Exchanges:

– Ensure the investment is liquid;

– Facilitate transfer of savings to investment in the most productive sectors;

– Promote higher standards of accounting, resource management and transparency in the management of business.

Roles and Functions of The Nairobi Stock Exchange

6

Other indirect functions performed by stock exchanges, include:

Growth of related financial services sector e.g. insurance, pension and provident fund schemes which nurture the spirit of savings.

Improvement of access to finance for new and smaller companies - The Alternative Investments Market Segment (AIMS). This can also be realized through Venture Capital institutions which are fast becoming key players in financing small businesses.

Encouragement of public floatation of private companies increasing the supply of assets available for long-term investment.

7

What are shares and bonds

A share is a unit of ownership A bond is a loan between a borrower and lender at

a promise to pay interest.

8


Capital Markets Structure

9

Regulatory Bodies The Capital Markets Authority (CMA)

The Nairobi Stock Exchange (NSE)

Regulations CMA (Securities), (Public Offers, Listing and

Disclosure) Regulations, 2002;

NSE Listing Manual, 2002;

NSE Membership Rules, Trading Rules, Delivery and Settlement Rules;

Corporate Governance Guidelines, 2002.

10

Regulations

CMA (Takeovers and Mergers), Regulations, 2002;

Collective Investment Schemes, Regulations 2001;

Central Depository Act 2000;

CMA Foreign Investor Regulations, 2002;

Rating Agency Guidelines, 2001

11

LISTING IN NSEWhy list?

Institutions list Securities primarily: To unlock value. Sponsors, Promoters and Venture

Capitalists use the capital markets to exit their investments or share risk.

To raise funds for expansion and growth without the interest burden of funds borrowed from lending institutions.

To improve the liquidity of their securities.

To increase public awareness about the institution and its products.

12

MAJOR BENEFITS OF LISTING

Funds for expansion and growth without the interest burden.

Provides a market for securities.

Greater liquidity of securities.

Improves perception of an institution’s financial stability and transparency.

Objective valuation of securities by market forces.

Greater efficiency due to more rigorous disclosure requirements.

Greater public profile and awareness of the institution and its products.

13


The NSE Market Segments

14

The Market Segments

The Main Board

The Main Investment Market Segment (MIMS);

The Alternative Investment Market Segment (AIMS);

The Fixed Income Securities Market Segment (FISMS);

Futures and Options (FOMS)- to be implemented

Soon to be introduced (Distinct from the Main Board):

4. Over the Counter (OTC) Market Segment

15

METHODS OF LISTING

Securities may be brought to listing by way of:

Initial public offering (IPO): where the public at large is invited to subscribe.

Introduction: to provide a market for existing shareholders.

Private placement: shares are placed for sale to already identified investors.

16


Eligibility Criteria for Listing

17

Eligibility Requirements for Public Offering of Shares and Listing

Part A Part B

Requirement Criteria for MIMS Criteria for AIMS

Size: Share Capital

Min. authorized issued and fully paid up share capital of Ksh. 50.0 million.

Min. authorized issued and fully paid up share capital of Ksh. 20.0 million.

Size: Net Assets Immediately before the IPO should not be less than Ksh. 100.0 million.

Immediately before the IPO should not be less than Ksh. 20.0 million.

18


Part A Part B


Track Record, profitability and future prospects

+ve profits after tax attributable to shareholders in at least 3 of the last 5 completed accounting periods prior to listing.

Must have engaged in the same business for a min. of 2 years, 1 of which should reflect a profit with good growth potential.

19


Part A Part B


Share ownership Structure

Following the IPO at least 25% of the shares must be held by not less than 1000 shareholders excluding employees.

Following the IPO at least 20% of the shares must be held by not less than 100 shareholders excluding employees/family members of the controlling shareholders.No investor shall hold more than 3% of the 20% shareholding.

20

Eligibility Requirements for Public Offering of FIS and Listing on the

FISMSRequirement

Incorporation with limited liability

A public company registered under the Companies Act (Cap 486) or any other body corporate established or incorporated in Kenya under the provision of any written law.Issuers of commercial paper may be private companies.

Size: Share Capital

Min. authorized issued and fully paid up share capital of Ksh. 50.0 million, and net assets of Ksh. 100 million Immediately before the IPO.

Listing and transferability of securities

All fixed income securities (FIS) except for commercial papers shall be listed, freely transferable and not subject to any restrictions on marketability or pre-emptive rights.

21

Requirement

Availability and reliability of financial records

The issuer other than GoK issuing T-Bonds or other Government securities, must have published audited financial statements complying with IAS for an accounting period ending on a date not more than 3 months prior to the proposed date of the offer.Where not more than 9 months have elapsed since the end of the financial year to which the last published annual accounts relate, the issuer shall prepare an interim audited financial statement covering at least the first 6 months following the end of that financial year.

Eligibility Requirements for Public Offering of FIS and Listing on the

FISMS

22

Eligibility Requirements for Public Offering of FIS and Listing on FISMS

Requirement

Certificate of Comfort

If the issuer is a bank or insurance company, the issuer must obtain a certificate of no objection from the relevant regulator.Where there is a guarantor and in the event that the guarantor is a bank or insurance company licensed to operate in Kenya, the consent of the CBK or the Commissioner of Insurance as the case may be, will be required.

23


Requirement

Track Record, profitability and future prospects

+ve profits after tax attributable to shareholders in at least 2 of the last 5 financial periods prior to listing.

Guarantee Requirements

When the issuer does not satisfy the requirements it may seek a credit enhancement to have the securities it seeks to issue guaranteed, or where the issuer is not willing to be subjected to disclosure,

Debt Ratios Total indebtedness, including the new issue of FIS shall not exceed 400% of the company’s net worth (or gearing ratio of 4:1) as the latest balance sheet.

24


Requirement

Size of the Issue The minimum size of issue shall be Ksh. 50 million.The minimum lot size shall be:Ksh. 100,000 for corporate bonds and preference shares or higher amount as maybe required by the Authority; andKsh. 1,000,000 for commercial paper.

Minimum size for listing

To maintain a listing, the minimum size of the FIS listed shall be Ksh. 50,000,000, except in the case of redemption.

Renewal Date Every issuer of debt shall apply for renewal at least 3 months before the expiry of the approved period of 12 months from the date of approval.

25


The Continuing Listing Obligations

26

Incorporation: The company must be incorporated or registered under the Companies Act.

Financial records: shall have published audited financial statements complying with IAS for an accounting period ending on a date not more than 3 months prior to the proposed date of the offer for issuers whose securities are not listed and 6 months for issuers whose securities are listed.

General Eligibility Requirements for Public Offering of Shares and Listing

27

Competence and suitability of directors and management: The issuer must not be in breach of any of its loan covenants – the maximum debt capacity.

As at the date of application and for a period of 2 years prior, no director shall have:-

– Any petition under bankruptcy laws (individuals), winding up petition (corporates);

– Any criminal proceedings, nor be subject to any pending criminal proceedings, or any offence or such action within or outside Kenya;

– Subject to any ruling of a competent court/Government body that prohibits temporarily or otherwise from engaging in any type of business practise or activity


28

RESPONSIBILITIES OF A LISTED INSTITUTION

Once on the Official List, the institution has a number of responsibilities which can broadly be classified into:

Disclosure;

Corporate governance;

Investor relations.

29

Competence and suitability of directors and management:

Suitable senior management with relevant experience for at least 1 year prior to listing.

No change of management for a period of 12 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.

At least a third of the Board as non executive directors.


30

Transferability of Securities: Securities must be freely transferable and not subject to any restriction on marketability or pre-emption rights.

Undertaking: The Company must undertake to comply with the rules of the market

Voting Shares: Only one class of voting shares which are the shares listed on the Exchange.

Approval: All Companies seeking listing shall have their information memoranda or prospectuses approved by the Capital Markets Authority.

Shares: Only fully paid shares are listed at the Exchange.

Dividend Policy: Clear future dividend policy.


31

Solvency and adequacy of working capital: Should not be insolvent.

Certificate of Comfort: If the issuer is listed in a securities exchange outside Kenya or is licensed to operate as a bank or an insurance company the issuer must obtain a letter of no objection from the relevant regulator.


32

Disclosure of Periodic Financial Information

Dividends and interest

Such payments on issued securities should be notified to the securities exchange, the Authority and the securities holders immediately upon declaration by means of a press announcement.

The declaration shall be at least 14 days prior to the closing date of the register and shall contain the following minimum information:

– the closing date for determination of entitlements;

– the date on which the dividend or interest will be paid; and

– the cash amount that will be paid for the dividend or interest.

33


Interim and Preliminary Reports

An Issuer shall publish an interim report within 2 months of the end of the interim period in the financial year and shall notify the Securities Exchange and the Authority. Where an Issuer has subsidiaries, the said report shall be based on the group accounts.

34


Annual Financial Statements

Every Issuer of securities to the public shall prepare an annual report containing audited annual financial statements within 4 months of the close of its financial year. A complete set of financial statements includes:

– Balance sheet;

– Income statement;

– A statement showing either all changes in equity; or changes in equity other than those arising from capital transactions with owners and distributions to owners;

– Cash flow statements; and

– Accounting policies and explanatory notes.

35

Communication with Shareholders

Convening Meetings

Shareholder meetings shall be convened at least 21 clear days before such meeting is held. Notices shall specify the place, date, hour and agenda of the meeting.

the issuer will ensure that all the necessary facilities and information are available to enable holders of its securities to exercise their rights. In particular it shall:

– inform securities holders, meetings which they are entitled to attend;

– Where applicable, enable them to exercise their voting rights; and

– publish notices or distribute circulars giving information on:

the allocation and payment of dividends and interest;

the issue of new securities, including arrangements for the allotment, subscription, renunciation, conversion or exchange of the securities; and

redemption or repayment of the securities.

36

Communication with Shareholders

Convening Meetings

If a circular is issued to the holders of any particular class of security, the issuer shall issue a copy or summary of the same to the holders of all other listed securities.

the issuer shall forward to the Securities Exchange and the Authority copies of:

– all circulars, notices, reports, announcements or other documents at the same time as they are issued; and

– all resolutions passed by the Issuer other than resolutions concerning ordinary business at an AGM without delay after the relevant general meeting.

37

Audit Committee and Corporate Governance

Every issuer shall establish an Audit Committee and comply with guidelines on corporate governance issued by the Authority.

There should also be public disclosure in respect of any management or business agreements entered into between the Issuer and its local or foreign associated and related companies, which may result in a conflict-of-interest situation.

Documents

NAIROBI STOCK EXCHANGE NAIROBI STOCK EXCHANGE