The Capital Markets Authority (CMA) has given the nod to the setting up of the contentious recovery board for troubled companies listed on the Nairobi Securities exchange (NSE) in a move aimed at protecting investor interests and reviving confidence in the stock market.
The move will see troubled firms such as TransCentury, Kenya Airways, Mumias Sugar Company and Uchumi Supermarkets transferred to the special board for two years to help them get back to stronger footing.
Failure to recover within this period would eventually lead to delisting of such companies from the exchange.
TransCentury, Kenya Airways, Mumias Sugar Company and Uchumi Supermarkets are currently grappling with a mix of depleted shareholder funds, losses, lack of sales and financial reporting gaps, presenting a great risk for uninformed investors.
Investors trading in firms on the recovery board would be advised to trade with caution when dealing with troubled firms.
The policy shift, which has been in the works since 2018, seeks to protect investors from buying shares in troubled firms, avert unexpected company failures and help revive investor confidence in the volatile equity trading business.
The regulator, through a special notice in the Kenya Gazette, has authorised the NSE to prepare and submit for approval the rules for the setting up and administration of a board on which the shares of the troubled firms on the recovery list may be traded.
Under the plan troubled firms will be put on the recovery board for 24 months upon which they will be delisted or suspended from trading if they fail to comply with the listing requirements including solvency and corporate governance requirements.
No company shall, however, be suspended or delisted by the NSE without the prior written approval of CMA.
The separate trading board is designed for listed companies that fall into financial or management trouble.
These include those that fail to comply with disclosure requirements, those that delay in reporting of financial results and those whose working capital falls below the minimum or operate negative working capital positions.
A review of the financial statements of several listed firms shows that those likely to be put on the recovery board include East African Portland Cement, Home Afrika and Kurwitu Ventures which suffer from a mix of losses, capital shortfalls, lack of revenue and patchy financial reporting.
“A securities exchange may place an issuer on the recovery list on the direction or approval of the authority if the issuer fails to meet any of the continuing listing obligations or for any other reason, which, in the opinion of the authority, is likely to prejudice the interests of the investors or market integrity,” say the new rules.
“An issuer on the recovery list may apply to the authority to be removed from the recovery list if it complies with net assets and solvency requirements or such other requirements as may have been imposed by the authority.”
However, the rules contained in the gazette notice dated October 27, 2023, give troubled companies the right to be heard by the regulators (CMA and NSE) before being placed on the recovery board.
Front page graphic CMA and the market
According to CMA, firms placed on the recovery list shall be required to immediately announce the action through its website and in a daily newspaper with nationwide circulation.
These firms are also required within the prescribed time after being placed on the recovery list, to provide a restructuring plan approved by its members to the regulators and implement the restructuring plan within the prescribed time following the submission to the CMA and the NSE.
The new rules also require firms on the recovery board to furnish the market and the regulators with an update, once in every three months, on its efforts and progress made in meeting the exit criteria of the recovery list, including its financial situation, future direction, level of compliance with the continuing obligations or other material development that may have a significant impact on its compliance position.
“An issuer that fails to meet the requirements (listing and corporate governance requirements) within twenty-four months after the date on which it was placed on the recovery list, the securities exchange may delist the issuer; or suspend trading of the listed securities of the issuer with a view to de listing the issuer.”
Under the new rules trading in shares of companies put on the recovery list will continue unless a trading halt or a suspension is, or has been, effected.
The proposed Recovery Board is expected to have distinct rules and regulations including eligibility criteria, continuing reporting requirements, and periodic submissions to the regulator.
The CMA had in 2019 put the implementation of this recovery board on halt following a disagreement with the NSE on its implication on the market.
While CMA saw the new recovery board as a necessary buffer to protect innocent investors seeking to buy shares of the ailing companies, the NSE viewed the move as tantamount to condemning and shaming listed firms.
The NSE said singling out its troubled members will add more pain on the beleaguered bourse that is suffering from a prolonged lack of new listings and capital raising by existing firms through rights issues.
“This board affects the market. We received feedback from the market and some issues were raised. There have been some consultations with the CMA but no firm outcome yet. We are still in consultations,” NSE’s outgoing chief executive Geoffrey Odundo said in 2020.
“We have not yet come up with a formal position on how we are going to set up this recovery board.”
The targeted listed firms were worried of being pushed into a recovery board, arguing the action will send the wrong signals to investors about their financial soundness, thereby making their stocks less attractive.
Listed firms were also uncomfortable with the “recovery board” name tag.
The number of NSE-listed firms have dropped to 61 after the collapse or takeover of several companies in the past 15 years including ARM Cement, Marshalls East Africa Ltd, KenolKobil, National Bank of Kenya and Deacons East Africa.
Globally, Hong Kong, US, Pakistan, Japan, and India have introduced recovery boards to accommodate listed firms that do not meet the requirements of the main board and ensure key investor protection measures are maintained.
By JAMES ANYANZWA