We have, over the last two years, seen companies trading in the Nairobi bourse falling into financial distress, most shocking of all being companies that have been on a profit-making streak.
Banks on the other hand have also held that they will pull out from financing companies that do not make any profitable returns in the financial markets; invariably meaning that a considerable number of financially distressed companies will soon be placed under administration.
Taking into account the introduction of the lending rates, currently at 13 percent, banks have been quite cautious when extending loan facilities to financially distressed companies. In fact, most banks would rather issue term loan facilities and overdrafts to companies with better security, and lesser risks.
Financially distressed companies have become categorised as risky borrowers, thus the hardship they face when seeking to restructure their debts including debt financing, which consequently results to them being placed under administration.
Most companies are dependent on internal sources of finance, i.e. equity finance, provided by their owners (shareholders), retained profits, loans from shareholders and directors.
However, for munificent capital injections, companies will seek loan facilities from commercial banks. Large companies also have more choices available to them, as they may seek either bank-based or market-based financing. The heavy dependency on Bank financing is nonetheless an issue that has been the focus of concern in a number of official reports, stretching back several years ago.
The dilemma in our capital markets (especially when listed companies seek market-based financing) is the inevitable tension between investor protection and capital formation.
Poorly managed and operated companies will more often than not post false and misleading reports to the public, making investors rely on such financial reports to their detriment.
Although the Capital Markets Authority (CMA) as a regulatory body ensures that investors are protected, and those that have suffered loss as a result of inadequate, false and misleading corporate information are compensated (not to mention the fining of such companies), the question still remains, why do we have these systematic risks in the markets?
I, for one think it is high time the CMA cracks the whip on some listed companies; astutely investigating their statements and financial reports to ensure that the correct numbers and the true statement of accounts are published on time.
The CMA recently revealed a list of companies that continue to trade well below their required capital and liquidity levels. It is a requirement that any company listed in the Nairobi bourse, should, desirably, have its currents assets double the size of its current liabilities. Disclosure of relevant information by a listed company constitutes a pivotal regulatory technique, with its effectiveness depending on the level of enforcement.
Baston Woodland, Advocate of the High Court of Kenya.