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East African Capital Markets Rules Soften to Enlist SME's

Three east African bourses aim to set up alternative markets focused on fast-growing companies this year, a move they hope will also boost liquidity and draw more business.

The stock exchanges of Kenya, Tanzania and Uganda have each drawn up rules to allow small and medium-size enterprises, as well as other companies that do not qualify for their main boards, to list.

The effort is the latest attempt to breathe life into Africa's nascent bourses. Africa is home to some of the world's fastest growing economies but its small, relatively illiquid capital markets have yet to catch up.

"We're a young economy and we thought that in order to remain relevant as a stock exchange we needed to provide this platform for small companies looking to raise public capital in order to expand the business," said Donald Ouma, head of market and product development at the Nairobi Securities Exchange.

The effort, which senior officials said was not co-ordinated between the three countries, will create markets with less stringent criteria, including lower capital and shareholder requirements.

Neighbouring Rwanda may eventually follow suit. Rwanda's one-year-old stock exchange, home to four companies, may also introduce guidelines later this year to accommodate SMEs, a top regulator said.

The slow pace of listings by local companies on the exchanges has prompted the renewed effort to lure younger but riskier firms, many of them family-owned.

By targeting SMEs, which outnumber blue chips and are seen as an engine of job creation, they hope to nurture companies that could one day list on the main board and expand into the wider East African Community.

A flotation could also provide an additional source of financing for firms that often rely on short-term credit from banks or, if lenders view them as too risky, family resources.

The Uganda Securities Exchange and the Nairobi Securities Exchange will name their new markets the Growth Enterprise Market Segment (GEMS), while the Dar es Salaam Stock Exchange in Tanzania has opted for the Enterprise Growth Market Segment.

All three attempted alternative markets in the past but were unable to attract new firms because the rules were still too onerous or they were seen as inferior to the main market.

This time, the officials said, the exchanges would step up efforts to market the benefits of listing.

Under the new rules, the three bourses require firms seeking admission to appoint a nominated advisor, a feature borrowed from the London Stock Exchange's Alternative Investment Market.

The advisor will guide the companies through the listing process and also advise them after admission.

Joseph Kitamirike, the USE's chief executive, told Reuters last week that he expected regulators to approve GEMS next month and that the exchange was already in talks with three potential candidates.

He said GEMS was designed for companies of any size that did not qualify for the main board, rather than SMEs. So far, firms in the insurance, transport and real estate sectors had shown interest but he also expected technology firms to join the segment.

"Any company that has a growth story to tell we are willing to facilitate," he said.


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