Collapsed brokers to lose proceeds of NSE shares sale

Stockbrokers that collapsed with investor money will have nothing to cheer about when the ongoing sale of Nairobi Securities Exchange (NSE) shares to the public is complete with any proceeds of the auction accruing to them set to be held by the markets regulator to settle outstanding claims.

Nyaga Stockbrokers, Discount Securities, Francis Thuo, Ngenye Kariuki and Shah Munge were allocated 5,250,000 shares each valued at Sh250 million despite having collapsed more than three years ago.  

The Capital Markets Authority (CMA) says any initial public offering (IPO) cash accruing to Nyaga Stockbrokers and Discount Securities, both under statutory management, will be seized to settle claims against them estimated at hundreds of millions of shillings.

“The value of share ownership in the NSE of these two entities (Nyaga and Discount) will continue to be held for the benefit of settling valid claims from investors,” said CMA acting chief executive Paul Muthaura.

Mr Muthaura added that the Investor Compensation Fund also has a claim against the two brokers arising from settlement of client claims.

Francis Thuo’s IPO cash will go to Equity Bank, which bought the broker together with its liabilities last year.

The stockbrokers fought hard to get included in the list of NSE owners ahead of the listing and were on course to receiving millions of shillings from the sale.

Most of the stockbrokers are owned by individuals, making them direct beneficiaries of the IPO cash and the regulators appear to be seeking to forestall a possible investor outrage at the prospect of collapsed brokers benefiting from the share sale without settling outstanding debts.

The compensation fund has paid investors who lost money with the collapse of brokers a total of Sh365 million.

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 investor compensation fund had Sh727 million at end of June last year, according to the CMA’s annual report and has not recently made any payments to investors.

Most of the Nyaga Stockbrokers investors have been paid and the CMA started paying Discount claims in 2012.

The investor compensation fund has also been allocated 6,562,500 shares in the NSE worth Sh62.3 million in recognition of the role it has played to win back investor confidence after a series of broker collapses.

The fund has a maximum compensation limit of Sh50,000, meaning that those whose claims were not fully settled because of the cap could go back for more.

Consolidated Bank has recently gone to court seeking to appropriate assets that Nyaga Stockbrokers used as collateral for loans it took from the lender.

READ: Consolidated Bank wants broker Nyaga’s asset freeze lifted

Ngenye Kariuki, which exited statutory management in 2011, is still paying investors who lost cash when it collapsed a year earlier.

The broker is currently said to be working with the markets regulator on a plant that could see it return to the Nairobi bourse and the CMA is said to have laid down payment of investor claims as part of the conditions it must meet.

Ngenye Kariuki sold 10 per cent of its shares to three investors, a move that helped lift its capital base from a negative position. Shah Munge was the first stockbroker to collapse in 2003 and the CMA said there are no outstanding investor claims against the firm.

The authority, however, maintained that anyone with a solid claim against the broker can go to court and have it validated — a statement that is likely to excite the National Social Security Fund (NSSF), which lost huge sums of money with the broker.

“In the case of Shah Munge, it is not currently a licensee of the authority and is not the subject of any outstanding administrative process. Any person that believes they have a valid claim against the company would be entitled to lodge any such claim against the assets of the company through the courts,” said Mr Muthaura.

Francis Thuo and Partners collapsed in early 2007, the first in a series of stockbroker failures that were largely blamed on bad corporate governance and fraudulent selling of shares by the intermediaries.

Nyaga Stockbrokers suffered the same fate in 2008, followed by Discount Securities in 2009. Ngenye was put under forced management in 2010.

The NSE will be selling 63.5 million shares to the public in the next three weeks at Sh9.50 per unit before listing them at the bourse on September 9. Investors will require a minimum Sh4,750 to participate in the offering.

READ: NSE launches IPO with expansion on the cards

Ceding of the collapsed brokers’ stake in the exchange will help stockbrokerages reduce their shareholding to the required 40 per cent in three years.

The brokers, who will own 59 per cent of the bourse if the IPO is successful down from the current 90 per cent, have not agreed on how they will be reducing their stake to comply with the 40 per cent requirement.

This is contrary to other listings where majority shareholders are usually locked in the company for a minimum period, mainly five years, to ensure they share the fate of investors who buy into the company.