Choice of rights issue broker puts KQ on the spot

MPs are pushing for greater transparency in the selection of stockbrokers to handle future rights issues for State corporations after the award of the Kenya Airways contract to a single broker caused protest from other market intermediaries.

Standard Investment Bank, which was the lead sponsoring stockbroker for the Sh20.6 billion KQ rights issue, was awarded the Sh70 million contract to buy the rights allotment for the Treasury, which owns 23 per cent of the national carrier.

Members of the Parliamentary Committee on Finance faulted the procedure used by Kenya Airways to give the Treasury’s provision allotment letter (PAL) worth Sh70 million in commissions to Standard Investment Bank (SIB), saying the move was not transparent.

Kenya Airways sought to raise funds from the rights issue to finance its expansion, mainly the purchase of new aircraft. Standard Investment Bank also got the letter for Dutch airline KLM, Kenya Airways’ single largest shareholder with a 26 per cent stake, as well as IFC’s letter – earning a total commission of Sh180 million.

The chairman of the parliamentary committee, Chris Okemo, said there was concern that giving of the letters to SIB amounted to single sourcing by an entity that is significantly owned by the public.

“Kenya Airways should be told to be transparent,” Mr Okemo said when the committee met with officials of the Capital Markets Authority at Continental House in Nairobi. Investment secretary, Esther Koimett, said in a previous interview with the Business Daily that KQ was not obligated to follow public procurement rules since the commission was paid directly by the airline, and not the Treasury.

(Read: Kenya Airways rights issue attains minimum sale target)

During the committee hearing, Kisumu Town East MP, Shakir Shabir, said the government action was wrong because the transaction involved public funds.

A market player who declined to be named because of the sensitivity of the matter separately said that had the tender for the PAL been floated, it would have resulted in a commission payback —whereby a stockbroker signs to give a discount on commission earnings to the investor, as part of their attempt to win a deal. Mr Shabir said the winning broker would likely have saved the taxpayer tens of millions of shillings.

CMA’s market operations manager, Wycliffe Shamiah, told MPs the shareholders had the right to decide who was to handle the PAL, but added that it touched on a grey area in which the regulator would require some guidelines going forward. “To help in such transactions in future, we need some guidelines,” said Mr Shamiah.

The MPs had asked for advice on how to move forward on the matter and directed the CMA to file a write-up with the committee to help in preparing a report to parliament on the issue.

CMA chairman Kung’u Gatabaki told the MPs that the market for brokerage services in major transaction tended to be dominated by up to four companies.Mr Gatabaki said that he had urged the some of the smaller brokerage houses to merge in order to be competitive in securing major deals.

The chief executive of the Kenya Association of Stockbrokers and Investment Bankers (KASIB) Willie Njoroge said that it was true that the CMA had urged such a move in order to benefit from the new strength.

“We know the CMA is keen to see mergers of brokers. We have discussed the issue several times. But it is really upon the individual members of KASIB as the decision will have to be made by their shareholders,” said Mr Njoroge.

In a letter to Ms Koimett relating to the issue, KASIB chairman John Kirimi had protested the giving of the PAL to one stockbroker, saying it should either have been competitively tendered or should have been subdivided among the recognised brokers.