Companies seeking to list on the Nairobi Securities Exchange (NSE) are now required to show proof of having made a profit once in the last five years to issue shares under new relaxed rules aimed at ending a seven-year initial public offerings (IPOs) drought at the bourse.

This is a step down from the current requirement that for a company to go public it has to show that it made profit in three of the last five years, a condition that restricted many unprofitable businesses from raising capital through IPO.

The changes are contained in the new regulations on public offers, listings and disclosures published by Treasury Cabinet Secretary Njuguna Ndung’u.

A prolonged tough operating environment -- which started at the peak of the Covid-19 pandemic in 2020 and aggravated by the Russia-Ukraine war and the hiking of interest rates by the central banks in rich countries -- has left a lot of businesses struggling to grow their bottom lines.

“The issuer should have good growth potential and a revenue earning record with at least one of the last five years of business operations reflecting a profit,” says The Capital Markets (Public Offers, Listings and Disclosures) Regulations, 2023.

Companies that wish to list under the SME Market Segment need not be profitable. However, they need to provide a business plan showing potential to grow into profitability.

“The issuer should have a credible and auditable business plan with verifiable growth potential and at least a major asset or a contracted business opportunity consistent with its line of business,” say the regulations.

The NSE experienced a prolonged listing drought, with the last time a company issued shares in the stock market being in October 2015, when the Stanlib Fahari REIT (now ILAM Fahari I-REIT) was listed.

Companies have in the past cited the tough listing requirements as well as high fees for the IPO drought.

“The other point is that there are these good companies which will start listing when they are facing some challenges. That is part of what has contributed to the drought,” said Michael Odundo, a research analyst at the Standard Investment Bank.

The listing drought has unsurprisingly coincided with a long period of bear market at the NSE, which has seen the benchmark index, the NSE 20 Share Index, slide to 1,512.96 points.

There have also been a number of voluntary delistings after takeovers of firms by foreign investors, including Access Kenya, Rea Vipingo, CMC Motors and KenolKobil.

The latest changes come at a time when the government has lined up 11 State-linked entities with an asset value of over Sh200 billion for privatisation.

Stable government-owned firms that the Kenya Kwanza administration plan to offload include Kenya Pipeline Company, Kenyatta International Convention Centre, Kenya Literature Bureau, New Kenya Cooperative Creameries, and the Kenya Seed Company.

However, companies such as National Oil Corporation (NOC), Rivatex East Africa Limited, Kenya Vehicle Manufacturers, Mwea Rice Mills and Western Kenya Rice Mills have not been profitable.

Other than relaxing the listing requirement on profitability, under the new rules all the legal entities can issue securities, including limited liability partnerships. Initially, only companies were allowed to issue.

The new regulations collapse the three market segments — Main Investment Market Segment, Alternative Investment Market, Growth Enterprise Market Segment— into two.

The two categories are the Main Investment Market Segment and the SME Market Segment.

The last successful privatisation by the government was the Safaricom initial public offering in 2008.

Large State-controlled firms whose shares were listed during the Mwai Kibaki era between 2003 and 2008 include KenGen, Kenya Reinsurance and Mumias Sugar.