Tuesday, July 23, 2013

GEMS: Growth Enterprise Market Segment


First published on Dream Properies Ltd Website on 23rd July 2013

We could soon own shares in some of our favorite SME’s. Yes, you read that right. This is as a result of the CMA together with the NSE and the CDSC launching the Growth Enterprise Market Segment (GEMS) in January this year. The Segment aims at providing a more facilitative framework for Small & Medium Enterprises (SME’s) to access listing of the approved securities exchanges.

A great example of a listed small comapany is Home Afrika, a property developer here in Kenya whose shareholders recently assented to the company’s bid to establish a Sh10 billion consolidated fund. This fund in addition to the use of REIT's will finance Home Afrika projects as well as its expansion into other countries in Africa.

One of the great results will be deepening of the market & increased investment opportunities in Kenya. So, before you head down to your next business meeting or go off for a round of golf with your associates, allow me to break it down for you, just so you can face the question, “Are you planning on listing your business yet?” well armed.

What exactly are GEMS?
GEMS market is a platform that can be used by growing companies to raise initial and on-going capital provided by the public, while also benefiting from increased profile and liquidity. It’s an alternative method of harnessing savings at a regulated environment to suit their needs. The main aim of the GEMS counter is to create an avenue for firms with high growth potential to access venture capital through public markets to expand their businesses and raise their profile. GEMS is the easiest counter to get listed on because the entry barriers are set much lower than those of the Main Investment Markets (MIMS) and Alternative Investment Markets.

What Types of Companies is Eligible?
The GEMS is open not only to the SME’s but also a broad spectrum of companies whether they are large capitalized entities or small companies.

Why Should I List My Company?
I. Access to capital to fund acquisitions as well as for growth (You can also use your listing to expand your market for example into the rest of Africa)
II. Boost your public profile with customers, suppliers, the media and investors.
III. Create value and liquidity for shareholders; because your company’s value is independently assessed, shareholders can realize their investment, liquidity is stimulated and your shareholder base may be broaden.
IV. You may offer share incentives (stock options) to employees to encourage commitment and improve productivity at work.

Costs & Benefits?
I. Stamp Duty: Exemption of stamp duty and VAT on the transfer of listed securities for the Investor and no stamp duty payable on share capital or increase in share capital of a company listed on the exchange for the Company.
II. Tax Incentives: Kenyan Investors and members of the EAC pay a withholding tax of 5% on dividends while foreigners pay 7.5%. For the Company: 40% issued share capital listed tax rate 20%(5yrs), 30% issued share capital listed tax rate 25%(5 years), 20% issued share capital listed tax rate 27%(3 years)
III. Legal Costs: Legal and other incidental costs relating to introduction is corporate tax deductible.
IV. IPO Costs: Tax deductible to both investor and company; therefore leaving more value to shareholder
V. ESOPS: CIS set up by employers on behalf of employees to invest in listed shares is exempts from income tax
VI. Capital Gains Tax: Suspended for investors for listed companies

What Do I Need to Qualify?
I. Incorporation status: Public company registered under the Companies Act.
II. Minimum Authorized Issued and Fully Paid up Share Capital KES 10 Million ($114,168.00)
III. Shares in Issue At least 100,000 in issue.
IV. Pre Listing Accounting Requirements Audited accounts for one year of operations (no profit requirement)
V. Post Listing Share ownership: Within 3 months of listing, at least 15% of the shares must be held by not less than 25 shareholders (excluding employees of the issuer or family members of the controlling shareholder)
VI. Track Record, profitability and future prospects prior to listing, audited accounts for one year of operations. There is no requirement to have made a profit, during this time.
VII. Working Capital and Solvency: Adequate amounts of WC for at least 24 months after Listing
VIII. Number of Directors: Five directors, one third non-executive. The directors must have completed the Directors. Induction Programme (DIP) or must complete the same within 6 months after listing. They also should have had no bankruptcy, fraud, criminal offence or financial misconduct proceedings for 2 years
IX. Board and Management Experience: At least one years’ experience running the business.
X. Lock-in Period: Controlling shareholders cannot sell for at least twenty four (24) months, their entire stake

Sounds Great So Far, So How Do I List?
To list on the GEMS counter, a company is required to retain a nominated advisor (NOMAD) by appointment through a written contract. A NOMAD is basically a firm or company which has been approved by the Nairobi Stock Exchange as a nominated adviser for the Growth Enterprise Market Segment (GEMS) and whose name has been placed on the register of nominated advisers published by the NSE. Only one NOMAD should be contracted and retained prior to listing and through the entire period of listing onwards. This is also a requirement as good corporate governance practice.

Where Can I Find a NOMAD?
NSE registered nominated advisors are listed below:
 African Alliance Investment Bank
 Burbidge Capital
 CBA Capital
 Emerging Africa Capital
 Faida Investment Bank
 Kingdom Securities
 NIC Capital
 Standard and Mutual
 Dyer and Blair
 Standard Investment Bank
 Horizon Africa Capital Ltd.
 AIB Capital Ltd.
 CFC Stanbic Financial Services.
 Dry Associates

Hopefully these points will help you make a bit of a well-informed choice when it comes to this venture.

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