nairobi stock exchange presentation on the nairobi stock exchange

NAIROBI STOCK EXCHANGE

PRESENTATION ON THE NAIROBI STOCK EXCHANGE

Visit by Netherlands Private Sector

Development Staff

Mr. Chris MwebesaChief ExecutiveMarch 29 2007

TABLE OF CONTENTS

The Role of the Nairobi Stock Exchange (NSE) Current Status of the NSE Market Structure Market Performance Overview Automation of the NSE Trading System Participation in the Capital Markets

– A case for investing in securities;– A case for financing through the capital

markets Policy & Tax Incentives for Companies Listed on

the NSE Eligibility Criteria for Listing on the NSE


The Role of the Nairobi Stock Exchange (NSE)


SOME DEFINITIONS OF A STOCK EXCHANGE:-

A "stock exchange" is a market place, a physical location where stocks and bonds are bought and sold, such as the Nairobi Stock Exchange, the JSE Ltd., New York Stock Exchange.

A stock market can be an actual place, but with the growth of electronic transactions a large fraction of stock market transactions are no longer centrally located in a particular location.

ROLE OF THE NSE:-

The Role of the NSE in the Kenyan Economy is best discerned by examining the mandate of the Exchange to all its Key Stakeholders.

We have numerous Stakeholders but the key ones are the Issuers (listed companies), Investors, financial services regulators and the Government.

NSE has a huge public profile and visibility which comes with a lot of negative publicity. We really are the first line regulator and where there are issues bigger than the NSE then the CMA must take up its mandate.

NSE NSE StakeholdersStakeholders

What we do for themWhat we do for them MandateMandate

InvestorsInvestors InformationInformationInvestment opportunitiesInvestment opportunitiesSecuritySecurityWealth creationWealth creationTransfer processTransfer processTransparencyTransparencyHelpdeskHelpdeskArbitration opportunityArbitration opportunityConfidenceConfidenceEducationEducation

To provide an open and effective To provide an open and effective transparent avenue for transparent avenue for price discoveryprice discoverywealth creation and managementwealth creation and management

IssuersIssuers LiquidityLiquiditySource of low cost capital Source of low cost capital Self actualizationSelf actualizationCompetitionCompetitionCompetitionCompetitionGovernanceGovernanceTax savingsTax savingsExitExitSuccessionSuccessionEducationEducation

To provide opportunities for To provide opportunities for unlocking valueunlocking valueenhancing profileenhancing profileraising governance standardsraising governance standardsmaximize shareholders valuemaximize shareholders value

MediaMedia InformationInformationNewsNewsClarificationClarification

To provide accurate, factual and To provide accurate, factual and timely financial informationtimely financial information

NSE NSE StakeholdeStakeholdersrs

What we do for themWhat we do for them MandateMandate

RegulatorsRegulators Regulatory opportunityRegulatory opportunityInformationInformationMarket developmentMarket developmentSource of revenueSource of revenue

To provide first line market regulationTo provide first line market regulation

GovernmenGovernmentt

Privatization/exit Privatization/exit opportunityopportunityBarometer of economyBarometer of economyRaise fundsRaise fundsExecute policyExecute policyFDIFDI

To provide a platform for policy To provide a platform for policy implementation, privatization and implementation, privatization and capital raisingcapital raising

Members Members and Market and Market intermediarintermediariesies

Business opportunitiesBusiness opportunitiesTransparencyTransparencyEfficiencyEfficiencyEconomies of scaleEconomies of scale

To provide robust capital market To provide robust capital market infrastructure for them to conduct their infrastructure for them to conduct their businessbusiness

CompetitorCompetitorss

CompetitionCompetitionOther markets Other markets (globalization)(globalization)BanksBanksReal estateReal estate

To remain relevant to our competitorsTo remain relevant to our competitors

StaffStaff EmploymentEmploymentCareer growthCareer growthSelf actualizationSelf actualizationSelf esteemSelf esteem

To be the employer of choice in the To be the employer of choice in the financial service sectorfinancial service sector


Current Status of the NSE


LISTINGS

Products listed on the Nairobi Stock Exchange 52 equities; 5 corporate bonds; 72 Government of Kenya Treasury Bonds


Market Structure


CAPITAL MARKET KEY PLAYERS

Capital Market Authority

Nairobi Stock Exchange

Central Depository & Settlement Corporation

Stockbrokers, Investment Banks and Dealers


Market Performance Overview


EQUITY MARKET PERFORMANCE : NSE 20 Share Index & Mkt. Cap.

(Dec. 2002 – Dec. 2006)

Mkt. indicator

31 Dec.2002

29 Dec.2006

% Change

NSE 20 Share Index

1362.85 5645.65 314.25

Mkt Cap.(Kshs. Billions)

112.05 791.91 606.75

EQUITY MARKET PERFORMANCE : NSE 20 Share

Index & Mkt. Cap. 31 Dec. 2002 to 29 Dec. 2006

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

Jan-03

Jun-03

Nov-0

3

April-

04

10 Sep

-04 Jan-05

Jun-05

29 Jul

-05

29 De

c - 06

Month

NSE 2

0-Shar

e Ind

ex

50

150

250

350

450

550

650

750

850

Marke

t Cap.

(K

sh. Bi

llion)

NSE 20 -Share Index Market Capitalization

Market Indicators – Full Year 2005 and upto 12 months ending December 29 2006

Mkt. Indicator 2005 2006 % Change

NSE 20 Share Index 3,973.04

5,645.65 42.10

Market Capitalization (Billions)

462.48 791.91 71.23

No. of shares traded (Million)

874.20 1,454.67 66.40

Equity Turnover (Kshs. Millions)

36,523.68

62,444.34 159.98

No. of Deals 176,483

382,366 239.01

Bonds Turnover (Kshs. Millions)

13,590.50

42,845.50 257.42

Market PerformanceJanuary & February 2007

Market Indicators: Mkt. indicator Jan 2007 Feb 2007 %

Change

NSE 20 Share Index 5,774.27 5,387.28 -6.70

Mkt Cap.(Kshs. Bn) 824.29 723.66 -12.21

No. of shares Traded (Mn)

136.31 109.08 -19.98

Equity Turnover (Kshs. Billion)

10.48 7.76 -25.95

No. of Deals 114,853 83,863 -26.98

Bonds Turnover (Kshs. Mn)

1.60 6.23 289.38

EQUITY MARKET PERFORMANCE : NSE 20 Share

Index & Mkt. Cap. 31 Dec. 2002 to 28 Mar. 2007

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000

Jan-03

Jun-03

Nov-0

3

April-0

4

10 Sep

- 04

Jan-05

Jun-05

29 Jul

- 05

29 Dec

- 06

Month

NSE 2

0-Shar

e Inde

x

50

250

450

650

850

1050

Marke

t Cap.

(K

sh. Bi

llion)

NSE 20 -Share Index Market Capitalization

EQUITY MARKET PERFORMANCE : NSE 20 Share Index & Mkt. Cap. (31 Dec. 2002 – 28 Mar. 2007)

Mkt. indicator

31 Dec. 2002

28 Mar. 2007

% Change

NSE 20 Share Index

1362.85 4791.22 251.56

Mkt Cap.(Kshs. Billions)

112.05 640.53 471.65

Market Absorptive Capacity

2005 2006

Equity

Kshs. 1.769 billion KenGen IPO Kshs. 7.8 billion;Scangroup IPO Kshs. 721.0 million;Eveready Batteries (E.A) IPO Kshs. 556.8 million;Diamond Trust Bank rights issue Kshs. 776.55 million;The GoK sale of its 18.04 stake in Mumias Sugar Company Kshs. 4.553 billion.

Debt 18 GoK treasury bonds with a face value of Kshs. 74.8 billion;Corporate bonds with a face value of Kshs. 5.8 billion

18 GoK treasury bonds with a face value of Kshs. 69.985 billion.

Kshs. 82.369 billion Kshs. 84.44235 billion (The market applied for Kshs. 18.2, Kshs. 3.8 and Kshs. 4.608 billion over and above the amounts required in the KenGen, Scangroup and Eveready Batteries East Africa IPOs respectively).

Privatisation transactions in the pipeline include the sale to the public and subsequent listing of Government stakes in the following:-

– 40% of Kenya Re-insurance Corporation;– 25% of Safaricom Ltd.;– 34 % of Telkom Kenya offloaded through

the NSE after 26 % has been sold to a strategic investor;

We also expect from the private sector:-– Access Kenya – it will be the first locally

owned ISP to list on the NSE

TRANSACTIONS IN THE PIPELINE


Automation of the NSE Trading System


AUTOMATION

The implementation of the Automated Trading System happened on Monday 11 September 2006;

The ATS is sourced from Millennium Information Technologies (MIT) of Colombo, Sri Lanka, who are also the suppliers of the Central Depository System (CDS). MIT have also supplied similar solutions to the Colombo Stock Exchange and the Stock Exchange of Mauritius;

The NSE trading hours have increased from 2 to 3 hours (10:00 am – 1:00 pm). Besides trading equities, the ATS is also fully capable of trading immobilised corporate bonds and treasury bonds.

Opportunity to enhance revenue streams through information vending to our stakeholders.

The implementation of the ATS and achievement of T+3, will bring us a step closer to meeting the Group of 30's (G30) standards on trading and settlement as adopted in 1989.


Participation in the Capital Markets

- The Case for financing through the Capital Markets


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 optimise their capital structure and lower

their cost of capital; To lengthen components of the capital

structure (especially debt); To increase public awareness about the

institution and its products; To unlock value. Founding shareholders,

Sponsors, Promoters and Venture Capitalists use the capital markets to exit their investments with the aim of making a return on the initial investment, or to realise the true valuation of their enterprise.

INSTITUTIONS LIST SECURITIES PRIMARILY TO:-

FINANCIAL BENEFITS OF CAPITAL MARKETS FINANCING

A company may issue:

– Shares;

– Debt (Bonds);

Both may be issued:

– Through a public floatation through an offer to the public such as the KenGen issue.

– Private placement to a few select investors such as the Shelter Afrique bond placement.

Optimization of Capital Structure

Far too many firms are too heavily geared courtesy of bank debt.

Bank debt increasingly the cause of bankruptcies or other insolvency interventions

No consideration for marginal cost of funds when borrowing

Diversify sources of funding from short term commercial bank financing

Optimal Capital Structure is defined as the mix of debt and equity which minimizes the weighted average cost of capital.

Factors affecting cost of capital that the firm CANNOT CONTROL!!

1. Interest rate regime;

2. Level of taxes;

Factors affecting cost of capital that the firm can CONTROL!!

1. Capital structure;

2. Dividend policy;

3. Investment policy;

By optimizing what is in the firm’s control the firm can significantly lower its cost of capital.

Lowering the Cost of CapitalEquity

Cost of equity capital is the dividend return adjusted for growth;

Dividend policy is in the control of the firm

Lowering of Cost of CapitalDebt

Cost of debt capital is interest payments adjusted for tax (tax deductible);

Coupon interest payments lower than commercial bank lending rates because of the relatively higher interest rate regimes pertaining in the region and subsequently higher commercial lending rates;

OTHER BENEFITS OF LISTING CONTD. . . .

Marketing Benefits

Increased profile hence brand equity;

Lock in customer-owners;

Improved perception of organisations stability;

Management Benefits

Benchmarking, comparisons with competitors;

Staff ownership (ESOPs) hence improved productivity;

Strict conformity to disclosure requirements – better corporate governance;

Long term relationships with brokers, investment advisers, the NSE;


Policy & Tax Incentives for Companies Listing on the NSE


Policy and Tax Incentives

As an incentive to encourage more listings at the NSE, the Minister proposed that newly listed companies pay corporation tax at a lower rate of 20%, for a period of 5 years, provided these companies offer at least 40% of their shares to the Kenyan public (2005);

New and expanded share capital by listed companies or those seeking listing exempt from stamp duty (2000/2001);

Companies that apply and are listed shall get a tax amnesty on their past omitted income, provided they make a full disclosure of their assets and liabilities and undertake to pay all their future due taxes (2001);

Expenses incurred by companies in having their financial instruments rated by an independent rating agency are tax deductible (1997/98);

Exemption of stamp duty and value added tax on the transfer of listed securities (1995);

Costs of IPOs were made tax deductible (1995)


Eligibility Criteria for Listing on the NSE


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);

ELIGIBILITY CRITERIA FOR LISTING EQUITY SECURITIES

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.

Part A Part B

Requirement

Criteria for MIMS

Criteria for AIMS

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.

Part A Part B

Requirement

Criteria for MIMS

Criteria for AIMS

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.

ELIGIBILITY CRITERIA FOR PUBLIC OFFERS ON THE FIS AND LISITING

ON FISMS

Requirement

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.

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.

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.


End
