Brokers hit the jackpot as NSE share valuation rises by 163pc
What you need to know:
Unlike other public offers where existing shareholders are often held to a tie-in period normally ranging between one and three years, the stockbrokers were free to sell their NSE stakes any time after the listing two weeks ago.
The listing of the Nairobi Securities Exchange (NSE) has raised the value of stockbrokers’ stakes by nearly two-and-a-half times, as the market capitalisation of the bourse which self-listed only two weeks ago soared to Sh4.9 billion.
By the close of trading on Friday, each of the 22 stockbrokers held stocks worth Sh131.3 million and individual brokers are now faced with a decision on whether to cash in on the gains at the expense of owning a stake in the market. The firms are looking at a gain of Sh81.4 million each on their 5.25 million shares in the NSE, which were valued at Sh49.9 million at listing. The stock closed at its highest level of Sh25 on Friday.
Some of the founder stockbrokers who have resisted the urge to sell out their businesses and are therefore set to book the outsized gains include Dyer and Blair’s Jimnah Mbaru, Standard Investment Bank’s James Wangunyu, Faida Investment Bank’s Bob Karina and Apex Africa Capital’s Kassim Bharadia.
Most stockbrokers have in recent years sold out their businesses to banks such as Equity, Co-operative, and NIC as well as financial services firm Old Mutual. Unlike other public offers where existing shareholders are often held to a tie-in period normally ranging between one and three years, the stockbrokers were free to sell their NSE stakes any time after the listing two weeks ago.
While the decision on when to sell is down to individual stockbrokers, the intermediaries are required to reduce their collective holding in the NSE to below 40 per cent within the next three years.
Mr Wangunyu, the SIB chairmnan, said that the three-year window has bought the stockbrokers some time before they are forced to sell off some shares. “At the moment, our stance is to hold. With the NSE generally on a bull run and all these other counters going up, the NSE counter could still go up (further), maybe into the Sh30 level under the circumstances,” he said. Market sources, however, indicated that some brokers have begun selling.
Under the pre-IPO shareholding structure of the NSE, 22 stockbrokers and investment banks held 5.25 million shares each (a 4.08 per cent stake) in the bourse, translating to a collective 89.8 per cent, with the remaining 10.2 per cent stake held then by the Treasury and the Investor Compensation Fund (ICF).
Their holdings were diluted to 2.69 per cent each (collective 59.3 per cent) due to the introduction of an additional 66 million shares during the public offer, which means that they still have to shed 19 per cent by 2017.
Mr Karina, who is also the NSE vice-chairman, said that with over 30 million shares having been traded since the NSE self-listed, there are individual and institutional shareholders who have amassed bigger stakes than that of individual stockbrokers. He suggested that the cap on stockbroker stakes be relaxed, given that some of the owners of NSE-listed firms are allowed dispensation to hold stakes that are higher than the 40 per cent the stockbrokers will be limited to.
“It would be good to leave the market to take its course, when it comes to shareholder stakes. It is, however, too soon since the listing for us as Faida to think about selling or buying more shares,” said Mr Karina.
On the value gain of the stock, Mr Karina said that while market players have been surprised at the rate of growth over the past three weeks, the relatively small number of the shares available right from the IPO meant that demand was always going to outstrip supply.
Even with all the 194.6 million shares potentially available for sale on the market, the free float is effectively limited to 30 per cent when stockbrokers choose to hold onto their stakes, taking into account the fact that the Treasury and the ICF’s 10 per cent is also not on sale.
Sterling Capital executive director John Kirimi said that the exchange intermediaries are looking at more than just a quick profit when considering whether to sell or hold onto their shares.
“The intermediaries looking to keep their stakes may be looking at the value the stake is adding on to their balance sheet as the price grows. It is an important factor to consider given that the capital requirement for an investment bank, for instance, is Sh250 million,” said Mr Kirimi.
“On the side of demand, the interest has largely come from institutional and high-net-worth investors, and it is telling that even as the price has gone up we have not seen a rush to sell up from the intermediaries.”
The Capital Markets Authority (CMA) will also be keenly watching as the NSE shares gain in price, with the ICF gaining additional resources with the appreciation in price of its 6,562,500 shares.
The ICF’s stake is now worth Sh164.1 million, up from Sh62.3 million three weeks ago. The compensation fund has paid investors who lost money with the collapse of several brokers a total of Sh365 million. The ICF had Sh727 million at end of June last year, according to the CMA’s annual report.
The CMA also has in its custody the stakes of Nyaga Stockbrokers and Discount Securities, which are worth Sh262.6 million, giving the regulator additional resources with which to compensate claimants arising from the two firms’ collapse. A forensic audit conducted after the collapse of Nyaga Stockbrokers showed that investors lost Sh1.3 billion and an equally large amount of money is estimated to have been lost with the collapse of Discount Securities.
The two collapsed brokers alongside Francis Thuo & Partners, Ngenye Kariuki and Company Ltd and Shah Munge were also allocated shares along with the other stockbrokers. Francis Thuo’s stake went to Equity Bank, which bought the broker together with its liabilities last year.
In an earlier response to the Business Daily’s queries, CMA acting chief executive officer Paul Muthaura said that Ngenye Kariuki Ltd, whose statutory management was lifted in 2011, has the discretion of whether to use its stake to settle any investor claim even as it seeks a fresh licence.
In the case of Shah Munge and Partners, Mr Muthaura said that with the entity currently not a CMA licensee or subject of any outstanding administrative process, one could only lodge a claim against the assets of the company through the courts.
