Editor’s note: This is general educational material on how an admission rule works. It is not investment advice and it does not evaluate any company. It is based on the exchange’s own rules and pages and the Kenyan regulations listed at the end.
Kenya’s junior board does not screen applicants through the exchange alone. It outsources the first and the continuing judgment to a private firm, the nominated advisor, which the exchange registers, inspects and can suspend. A company on that board cannot list without one, and cannot keep trading without one. The Nairobi Securities Exchange (Nominated Advisors) Rules, 2012, made under the Capital Markets (Licensing Requirements) (General) Regulations, set out what that firm must be and what it must do.
Who is allowed to be the gatekeeper
An applicant seeking registration as a nominated advisor must be a company incorporated under the Companies Act. It must have acted, or its authorised representatives must have acted, in at least three relevant corporate finance transactions during the three-year period preceding the application. The rules define what counts: advisory services on a public offering of securities, corporate financial restructuring, takeovers, mergers, acquisitions and privatisations, corporate financing options including issuance of equity or debt securities, loan syndication or investment. The firm must maintain professional indemnity insurance cover, hold suitable premises, systems, equipment and personnel, employ at least two people registered as authorised representatives, and designate a compliance officer.
The individual test is separate. An authorised representative must hold at least a first degree in accounting, finance, economics, law or another relevant discipline, be a member in good standing of a relevant professional body, have at least three years experience in significant corporate finance advisory roles and at least three years practical experience in the transaction types listed above, be in full time employment of the nominated advisor, demonstrate a sound understanding of capital markets operations and of small and medium enterprises in particular, and meet the Authority’s fit and proper requirements.
Registration is not a filing. The exchange may inspect the applicant’s premises, examine the firm to establish that it is ready to operate, and interview the proposed representatives to test their understanding of the legal framework and of the advisor’s responsibilities. It must decide within thirty days of a complete application, and must give an applicant a hearing before issuing a notice to disallow. Approved names go to the Authority within seven days and onto a public register open to inspection at all times. A refused applicant may appeal to the Authority.
What the advisor is on the hook for
The nominated advisor is responsible to the exchange, not to its client, for assessing the appropriateness of the company it acts for. That covers eligibility for listing on the segment and advising the company on compliance with the public offers and disclosure regulations. It may bring in other professional advisors, provided it retains overall management and responsibility for the process.
In assessing an applicant, the advisor must achieve a sound understanding of the applicant and its business, oversee the due diligence process and satisfy itself that material issues arising are dealt with or do not affect the applicant’s appropriateness, guide the applicant in preparing the admission documents, and ensure the applicant has sufficient systems, procedures and controls to comply with the regulations. If it later forms the opinion that a company it acts for is no longer eligible to be listed, it must promptly tell the exchange. It files an annual list of the companies it represents, lodges the nominated advisor agreement for each, and reports changes promptly.
Independence is policed by specific prohibitions rather than by a general principle. The advisor must show the exchange that its board and staff are independent of the companies it acts for. It may not act as reporting accountant or auditor to a company it represents unless it satisfies the exchange that safeguards are in place. None of its directors, employees or their associates may sit as a director of such a company except in the capacity of nominated advisor. Neither the firm nor those people, individually or collectively, may be a substantial shareholder of a company it acts for, defined as holding twenty five per cent or more of the class of shares or the votes attached, counting options and warrants as if exercised. They may be a significant shareholder, defined at ten per cent, only if the exchange is satisfied that adequate safeguards prevent conflicts. A breach caused by underwriting or trading activity must be reported to the exchange within twenty four hours.
Analysis: the advisor holds the trading switch
The sanction attached to losing an advisor is what makes the role structural rather than advisory. A nominated advisor may be removed by the board of the listed company on thirty days notice, or lose the mandate through suspension or revocation of its registration by the exchange, and it must itself give thirty days notice before ceasing to act. The company then has thirty days from the notice to appoint a replacement and must file the appointment letter and agreement within twenty four hours of doing so. If it fails to find a replacement within that notice period and ends up without an advisor, the exchange suspends trading in the company until one is appointed.
That is an unusual allocation of power. A firm the company pays, and can dismiss, also certifies to the exchange whether the company remains fit to be listed, and its departure closes the market in the shares. The rules manage the resulting tension by making the advisor answerable to the exchange for the assessment, by requiring it to state its reason for ceasing to act, and by putting registration, inspection and discipline in the exchange’s hands with an appeal to the Authority.
The admission thresholds explain why the design leans this way. The exchange’s published requirements for the segment ask for two years of business operations, minimum paid-up ordinary share capital of KES 10m, a minimum of 7 shareholders, total assets of at least KES 100m unless the Authority exempts, audited records for the last 1 accounting period, a credible and auditable business plan with verifiable growth potential and at least a major asset or contracted business opportunity, a free float of at least 10%, and a lock-in period of 24 months for controlling shareholders. The regulations set the same capital, shareholder and asset floors for the SME market segment. Those tests establish very little about an applicant’s quality on their own, which is precisely why a firm with corporate finance experience is inserted between the applicant and the exchange.
Two things a reader should keep in view. The tradable portion of one of these companies can be as small as a tenth of the shares, with control locked in for two years, so the continuing obligations of the advisor matter more here than the discipline a liquid market would otherwise supply. And the rules still speak of the Growth Enterprise Market Segment, while the exchange now presents the board as the SME Market Segment, so the naming in the rulebook and on the exchange’s pages does not match. What the published material does not show is any record of how often advisors have reported a company as no longer eligible, or how often trading has been suspended for want of an advisor. Those are the two events that would show whether the gate binds in practice.
