[2008-05-05]  End of an Era Nears for Barons of NSE
The glory days of a few stockbroking barons who overshadowed the affairs at the Nairobi Stock Exchange for much of its 54-year existence are headed for an abrupt end.

In comprehensive reforms meant to renew confidence in the capital markets, the Capital Markets Authority (CMA) is now pushing for new laws that will limit the maximum shareholding an individual can own in an investment bank to 25 per cent and increase the minimum capital to Sh250 million from Sh30 million. Stock dealers will require a minimum capital of Sh20 million, up from Sh10 million.


These rules, which Finance minister Amos Kimunya is expected to introduce in the Budget next month, will have major implications in this sector because most brokerage firms are family owned with founders holding huge shareholdings.

These family businesses owned and controlled the Nairobi Stock Exchange because they owned a chair, which gives them a seat of the board.

It is through this avenue that some stockbroking firms, epitomised by Dyer & Blair Investment Bank, have attained a larger-than-life image and have come to wield a lot of influence in the Kenyan capital markets. Dyer & Blair is one of Kenya's oldest and biggest brokerage house with an estimated share capital of one billion shillings.

Acting CMA chief executive, Stella Kilonzo, has called on all stakeholders and the general public to give their feedback on the proposed new rules and regulations within the next one month. With the new rules aimed at improving corporate governance in the sector-more in line with what has happened in the banking and insurance industry-family businesses will be forced to sell to outsiders to reduce their shareholding to 25 per cent.

The increase in minimum capital will come as an additional burden that could force the hands of many small brokers whose investors cannot raise money easily.

Due to the unique monopoly that a stockbroker's licence brings, it is expected that some of the big firms may consider listing their shares on the NSE through IPOs while others will be forced to do trade sales by selling huge stakes to commercial banks, a strategy that has been used by Solid Investments in a deal with NIC Bank.

Other brokers will be forced to sell to private equity funds or raise money from a motley of investors.

The measures are meant to inject a new dose of confidence in the stock exchange after widespread abuse of fiduciary role player by brokers left investors in grief over unauthorised sale of shares, disregard of instructions and delayed payments of proceeds from share sale.

The abuses and lack of internal controls have seen two brokers -Francis Thuo last year and Nyaga Stockbrokers two months ago - go under in circumstances that would have been avoided were ownership and management of stock brokers separated.

Under the most comprehensive reforms to the Capital Markets Act since CMA was established in the early 1990s that were floated on Friday last week, individuals will not be allowed to hold substantial ownership of stockbrokerage, investment bank and fund management firms.

The new rules interpret substantial ownership as "having a direct or indirect beneficial interest of more than 25 per cent of the issued share capital of a licensed institution."

Almost all the 25 licensed stockbrokers and investment banks are family owned businesses, with the exception of a few that have over the years hired professional management teams or those that have been bought out by bigger institutions.

The latter include Renaissance Capital that bought out Francis Thuo Stockbrokers last year, NIC Capital Securities that bought out Solid Investment Securities early this year, Barclays Financial Services (investment bank) and CFC Financial Services, which are publicly listed companies.

Under the rules, shareholders, directors, chief executives and key management staff of CMA licensees will be subjected to a "fitness" test by the capital markets watchdog, while management and ownership of licensed institutions shall be separated.

Persons previously convicted of economic crimes will not be allowed to own or control CMA licensed institutions that handle public funds as part of the "fitness" test if the proposed rules are enacted.

The wide ranging and potentially controversial amendments will in effect force stockbrokers to sell up to 75 per cent of their businesses to new investors over three years.

The disposals are expected to be motivated by another amendment that requires about 20 out of the 25 CMA licensed stockbrokers and investment banks to raise their minimum paid-up capital within six months of the measures being enacted.

Stockbrokers, who are basically intermediary institutions which assist investors to trade shares at the Nairobi Stock Exchange, will be required to increase their minimum statutory capital requirement from five million shillings to Sh50 million within six months upon the commencement date of the new rules. The capital base for a dealership-which allows brokers to trade on behalf of investors - has also been raised from Sh10 to Sh20 million.

That means a broker effectively requires Sh70 million to stay in the business, up from the previous Sh15 million. As of December last year, no stockbroker had reached this threshold.


For investment banks, only Dyer and Blair, Standard Investment Bank and CFC are currently in compliance with the proposed minimum paid-up capital requirement for investment banks with reported capitalisation of one billion shillings, Sh300 million and Sh250 million respectively.

Renaissance Capital declined to disclose to Business Daily its capital base , but it would be safe to assume the Sh251 million it paid for Francis Thuo's seat last year constitutes this.

The capitalisation level of other less visible investment banks contained in a list published by CMA on April 25 is not publicly known.

All the other investment banks and stockbrokers, though currently in compliance with CMA minimum paid-up capital requirements, will be required to inject more cash into their businesses.

The measures are widely expected to be announced with the budget next month and could become law by January next year as the Finance Bill is expected to have gone through Parliament by October.

The six-month grace period would then require the industry to have capitalised by July next year.

The Authority is also proposing the publishing of audited financial statements by some of its licensees.

The reforms also capture Mr Kimunya's promise of sweeping reforms in his June 2007 budget speech, in which he promised an overhaul of the capital markets Act to provide for more effective regulation of players and facilitate Kenya's growth as a regional financial services hub.

The proposals fall short of last week's proposal to increase stockbrokers' minimum capital requirement to Sh200 million and to raise investment bank's minimum capital to Sh400 million.

The proposed increases are, however, above recommendations by a CMA's own commissioned study released last year that proposed a minimum capitalisation of Sh25 million for brokers, and Sh100 million for investment banks.

The level of capitalisation of a business is considered crucial to its financial stability since management can draw from the capital account to cover for operational losses during difficult times.

A relatively low capital base and poor management has been blamed for Francis Thuo Stockbroker's collapse last year, and the placement of Nyaga Stockbrokers under statutory management in March this year.

Six stockbrokers and two investment advisors are also operating on conditional licences after they failed to meet CMA's licensing requirements to have their licenses renewed for 2008.

Other proposed amendments include an obligation on licensees handling Public Funds to have professional indemnity insurance of an amount not less than five times their daily average turnover, to cover losses arising from their default or negligence.


Source: Copyright © 2008 Business Daily.