Five brokers earn Sh500 million from sale of NSE shares

What you need to know:

Shares transferred were valued at Sh425 million based on the NSE’s current share price of Sh20.
The stock had, however, rallied to a high of Sh28 in the weeks following its listing through an initial public offering (IPO) at Sh9.5, indicating that the brokers may have earned up to a half-a-billion shillings from the trades.

Five stockbrokers have moved 21.25 million of their Nairobi Securities Exchange (NSE) stake since the September listing of the bourse, potentially earning Sh500 million.

Regulatory filings show that AIB Capital, Apex Africa Capital, Genghis Capital, Standard Investment Bank and Francis Drummond moved the stock in the period ending October 30.

Shares transferred were valued at Sh425 million based on the NSE’s current share price of Sh20. The stock had, however, rallied to a high of Sh28 in the weeks following its listing through an initial public offering (IPO) at Sh9.5, indicating that the brokers may have earned up to a half-a-billion shillings from the trades.

Prior to the IPO, the NSE was fully owned by the government (10.2 per cent) and 22 stockbrokers (89.8 per cent). Each of the market intermediaries held 5.25 million shares equivalent to a 4.08 per cent stake, which was subsequently diluted 33.91 per cent alongside that of the government in the IPO.

The brokers are required to significantly reduce their ownership of the exchange in the medium term. Capital Markets Authority (CMA) regulations require the brokers to cut their combined ownership of the bourse to 40 per cent within three years as part of the demutualisation process.

AIB Capital CEO Paul Mwai said the trades were in keeping with the ultimate objective of diluting the NSE’s major shareholders who are also market participants.

“Brokers have been encouraged to sell their shares. This is different from other IPOs where major shareholders are locked in for a number of years,” he said, noting that the trades were profitable having taken place on the back of the share rally. Official records show that AIB, Apex, Genghis, and SIB disappeared from the list of the NSE owners in October.

Francis Drummond, however, still held five million shares after trading 250,000 units of the NSE stock.

Dilution of brokers’ ownership in the NSE is meant to improve the bourse’s corporate governance by diversifying its ownership base beyond active capital market participants that have in the past presented a systemic risk in the market.

Francis Thuo collapsed in 2007, setting the stage for successive brokerage failures including that of Ngenye Kariuki, Nyagah and Discount Securities. Nyaga and Discount are still under statutory management. The failures were linked to a mix of weak corporate governance structures and outright fraud by the brokers.

READ: NSSF gets Sh1.4bn shares frozen after Discount collapse

The NSE said it is working closely with the CMA to improve corporate governance standards in the intermediaries on whom it relies to provide trading and capital-raising services.

“Various intermediaries have had challenges in the past that have adversely impacted the NSE,” the bourse said in its pre-listing prospectus.

“The NSE has since worked with the CMA, to boost standards of corporate governance among brokers via numerous regulations.”
The brokers have also been forced to boost their paid-up share capital levels, with that of investment banks rising to Sh250 million from the previous Sh30 million.

Stockbrokers must now be capitalized to the tune of Sh30 million from the previous Sh5 million. Besides improving stability and transparency in the capital market, squeezing the intermediaries is intended to give the investing public greater opportunity to buy into the exchange.

The NSE is the latest firm to be listed on the main investment market segment that has witnessed a series of de-listings occasioned by corporate takeovers, including that of internet service provider AccessKenya and motor dealer CMC Holdings.
Agricultural firm Rea Vipingo is also expected to go private as investment firm Centum and two British brothers (Richard and Jeremy Robinow) fight to acquire it fully.

The NSE’s initial public offering –which was oversubscribed by nearly eight times — set the brokers on the path to reduced ownership of the exchange. A local institutional investor, investing under a CFC Stanbic nominee account, has emerged as the single largest owner of the NSE with 14.1 million shares equivalent to a 7.2 per cent stake.

This places it ahead of the Investor Compensation Fund Board and the Treasury, which have 3.3 per cent stake each, bringing the government’s total interest to 6.6 per cent.

This underlines the impact of the founding shareholders’ dilution in the IPO, which saw individual investors from East Africa, mainly Kenyans, acquire a combined 22.52 per cent stake in the NSE by October.

Afrika Investment Bank, which was not an original NSE shareholder, was also attracted to the stock buying 2.8 million shares equivalent to a 1.4 per cent stake and slowing down the progress to dilute the intermediaries’ ownership in the exchange.

Foreign institutional investors accumulated a 4.22 per cent stake in the same period while the combined equity of foreign individuals stood at 0.32 per cent.

The new shareholders helped the NSE raise a total of Sh627 million which was earmarked for construction of new infrastructure and settlement of a Sh300 million mortgage from KCB. The exchange, which earns revenues from selling trading seats and listing fees among other charges, posted a 30 per cent drop in net-profit to Sh107 million in the half year ended June.