Brokers’ fight over stock market assets stalls reforms

A long-running ownership row between the capital markets regulator and brokers at the Nairobi Stock Exchange took a new shape last week after four investment banks were forced to downgrade their licenses for failure to meet new minimum capital requirements.

A flurry of letters exchanged between stockbrokers and the Capital Markets Authority (CMA) show that a planed restructuring of the bourse, expected to boost investor confidence, has almost stalled following the regulator’s decision not to recognise their ownership of the stock market.

The brokers had wanted the CMA to allow them to book the value of their stakes at the mutually held stock exchange- estimated at Sh251 million for each broker- as part of assets to be included in the balance sheets.

This would have seen all founder members of the Nairobi Stock Exchange (NSE) meet new rules requiring investment banks to increase their minimum capital to Sh250 million from Sh30 million, and thus secure their ticket to big transaction advisory deals that holders of stockbrokerage licences that have a lesser capital requirement of Sh30 million are locked from bidding for.

But in a letter addressed to the Kenya Association of Stockbrokers and Investment Banks (Kasib), the market regulator insists that the intermediaries will have to cede ownership of the bourse in a process called demutualisation, before the value of their claim of NSE’s assets can be ascertained.

“It is only timely completion of the demutualisation that this value will become available to members. This is in light of the fact that, at present, the NSE is a company limited by guarantee, which corporate form prohibits the distribution or allocation of value in the company amongst its members,” said the CMA chief executive Stella Kilonzo in a letter dated April 28, appearing to reject the brokers’ petition made in a letter sent almost a month earlier, on March 30.

The escalating tussle has seen an April target set for completion of the demutualisation come and pass, pushing back a reform agenda that was seen as key in winning back investor confided that eroded with the collapse of three stockbrokers in quick succession between 2007 and 2009.

Players who spoke to the Business Daily said they will not co-operate with CMA’s push for completion of the demutualisation process, especially now that four of them have been forced to revert to being stockbrokers after being disqualified from holding investment banking licences by the new rules on minimum capital.

“If it is the valuation of the NSE that is not available as of now, then we will stop the process of demutualisation until that valuation is available and our members’ shareholding determined,” said Kasib in the March 30 letter seen by the Business Daily.

The NSE is currently owned by 20 members, whose claim of a share equal to Sh251 million each puts total valuation of their stake at the bourse at about Sh5 billion.

The Sh251 million claim is, however, only based on the last sale price of a seat at the NSE in 2007, which some have said needs to be re-valued.

It also emerged that stockbrokers are split between those supporting the new capitalisation rules and a speedy demutualisation process and those opposed to reforms of the stock market.

Drummond, Sterling, Afrika and ApexAfrica investment banks were forced to revert to being stockbrokers after failing to comply with the new capital threshold.

The growing wedge was evident in an address that chairman of the bourse, Mr Eddy Njoroge, made on April 25 stating that brokers were ready to complete demutualisation “by the second half of this year,” a position that Kasib does not appear to support.

The brokers’ lobby organisation tells CMA in the letter sent in March that brokers who have reduced ownership of their firms to 25 per cent as stipulated in the reforms first announced by Finance minister Uhuru Kenyatta had done so under duress, but not out of their support for the ongoing reforms.