Capital Markets Authority chief executive Stella Kilonzo. Photo/FREDRICK ONYANGO
Drummond, Sterling and Afrika investment banks are expected to change their names to reflect their new status after reverting to stockbrokerage firms.
The three firms join ApexAfrica and Dry Associates among intermediaries that have downgraded their licences following new rules that required investment banks to raise their minimum capital to Sh250 million from Sh30 million.
Stockbrokers are expected to maintain minimum paid up capital of Sh50 million from Sh5 million in new requirements announced in 2009 and coming into effect this year.
“These licensees are in the process of effecting a change of name to reflect their licence status as stockbrokers,” said Capital Markets Authority (CMA) chief executive Stella Kilonzo in a statement announcing industry licensees for this year.
Equatorial Investment Bank was giving an “extended” operating licence, indicating that it had not met all regulatory requirements.
Through their lobby organisation the Kenya Association of Stockbrokers and Investment Banks, the intermediaries had requested CMA to postpone the new capital rules by three years.
The investment banks that opted to convert to stockbrokers will be cut off from bidding for lucrative advisory deals such as advising companies in initial public offerings (IPOs) or mergers and acquisitions (M&A).
They will however be able to sell and buy shares for their clients and offer all other ordinary brokerage services.
It emerged that the regulator wanted them to convert paid-up capital into cash or cash equivalents but most saw this as having the potential to tie up cash in low earning fixed-deposit accounts— which stood at an average 3.6 per cent as at the end of December 2010.
Seventeen brokers and investment banks including the three that have applied to change their status had met the minimum capital licensing requirement as at December 2010.
Drummond had Sh321 million in capital, while Sterling had Sh359 million and Afrika had Sh317 million.
“CMA came up with interesting risk calculations and said investment banks must convert their capital into cash. We did not see why we should convert this and keep the money almost idle in the bank,” said Samuel Wachira, general manager at Drummond.
By the end of last year, only Reliance Investment Bank, Equatorial and Dry Associates Investment banks had lower than the new minimum threshold.
“This risk-based supervision that CMA has adopted has changed the format of capital , meaning it must be in form of cash and therefore limits the operations of an investment bank that does not have a big balance sheet or is not affiliated to a commercial bank,” said Mr Wachira.
Five of the 11 investment banks are affiliated to commercial banks.
A fund manager requires Sh15 million to operate. “The requirement to put up Sh250 million, an 833 per cent increase within a short while, was too much. Furthermore, it locks up money and you can never withdraw it once it is capital. So even after appealing to the CMA not to view investment banks as commercial banks, they didn’t listen,” said James Dry, the MD of Dry Associates.
He said he had suggested to the CMA that the change be effected over a five-year period to ease the changeover.
“Investment banks are not commercial banks where you receive deposits. In fact, what Equity Bank makes in profit in a month is more than what the entire industry makes in a year,” said Mr Dry.
The total brokerage industry made Sh386.6 million profit after tax in 2010 while the average monthly after-tax profit of Equity Bank, for example, was about Sh591 million.
Dry Associates is now a fund management firm although it was an investment bank as at the end of December 2010.
Earlier, ApexAfrica Investment Bank changed its name to ApexAfrica Capital last year saying that the new name reflected what the institution does in terms of stockbrokerage.
