Small and medium enterprises (SMEs) will have a new window for raising funds from October if proposals from a recently concluded study commissioned by the Capital Markets Authority to formalise the counter (OTC) market is implemented.

The study concludes that the best way to approach the matter is to have the market run separately from the Nairobi Stock Exchange (NSE) which would however be a shareholder in the OTC company.

A timetable for the implementation shows that legal framework and the formation of the company should start this month. Companies should then express interest in listing from October, this year.

Only firms registered under the Companies Act with a minimum paid-up capital of Sh10 million and audited financial statements for the year will be eligible. Further, the listing company must operational and have at least a quarter of the interests controlled by 10 shareholders outside the principal owner.

A formal OTC market for corporate bonds, commercial paper and derivatives would be considered at a later stage.

Potential users of the OTC market are listed as SMEs engaged in productive activities such as manufacturing, information technology, finance, land buying and investments Specialised units owned by Saccos would also be eligible.

The OTC market has been successful in other countries such as Japan, Mauritius and Malaysia. The potential for the OTC market is huge given that an estimated 22,000 SMEs are registered in Kenya.

The actual appeal would however depend on the listing requirements. In other markets OTC rules were less stringent than those of the main market.

In the UK, there is no requirement for minimum paid-up capital but in Mauritius the minimum paid-up capital is lower than that of the main market by 20 per cent while in Pakistan it is lower by 90 per cent.

To be listed at the NSE main market currently, a company must have assets worth at least Sh100 million and must have made profits for at least three years of the last five years.

In contrast, companies on the OTC market in Japan are not required to have either made a profit or have a particular asset base. Opening an OTC market in Kenya would provide small but risky businesses with funds for expansion.

Malaysia's MESDAQ recorded 46 new listings in 2005 surpassing both main and second boards of Bursa, which collectively recorded 33 new listings. Japan's JASDAQ market size often surpasses that of the second segment of the Tokyo Stock Exchange while Mauritius's DEM has outperformed the official market in terms of listed companies with 50 companies against 41 in the official market.